UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 


LAW  LIBRARY 


AMERICAN  COMMERCIAL  LAW 
SERIES 

VOLUME       L  CONTRACTS. 

VOLUME      IL  NEGOTIABLE  PAPER. 

VOLUME    III.  SALES  OF  PERSONAL  PROPERTY. 

VOLUME    IV.  AGENCY;  PARTNERSHIP. 

VOLUME      V.  CORPORATIONS. 

VOLUME    VL  INSURANCE;  SURETYSHIP. 

VOLUME  VII.     DEBTOR  AND  CREDITOR;  BANK- 
RUPTCY. 

VOLUME  VIIL    BANKS  AND  BANKING. 
VOLUME     IX.   PROPERTY 


AMERICAN  COMMERCIAL  LAW  SERIES 
VOLUME  V 

THE  LAW  OF 

PRIVATE   BUSINESS 
CORPORATIONS 

WITH 

QUESTIONS,  PROBLEMS  AND  FORMS 
BY  ALFRED  W.  BAYS,  B.  S.,  LL.  B. 

MEMBER  OF  CHICAGO    BAR    AND    PROFESSOR    OF  COMMERCIAL 

LAW,  NORTHWESTERN  UNIVERSITY  SCHOOL 

OF  COMMERCE 


CHICAGO: 

CALLAGHAN  &  COMPANY 
1912 


Copyright,  191 J,  by 
CALLAGHAN  &  COMPANY 


THIS  SERIES  OF  BOOKS  IS 
RESPECTFULLY  DEDICATED  TO 

PROFESSOR  WILLARD  EUGENE  HOTCHKISS 

DEAN  OF  NORTHWESTERN  UNIVERSITY 

SCHOOL  OF  COMMERCE 

WHOSE  ZEAL  IN  THE  CAUSE  OF  COMMERCIAL 

EDUCATION  HAS  BEEN  A  CONSTANT  SOURCE  OF 

INSPIRATION  TO  THE  AUTHOR 


PREFACE  TO  THIS  VOLUME. 

An  attempt  has  been  made  in  this  volume  to  set 
out  the  general  law  which  governs  incorporated  com- 
panies and  to  give  a  few  practical  suggestions  con- 
cerning" their  organization  and  management.  But 
the  layman  should  bear  in  mind  that  the  law  of  cor- 
porations is  to  a  considerable  extent  a  matter  of  local 
statute,  and  that  such  statutes  are  often  modified 
or  changed.  If  a  corporation  is  formed,  or  if  change 
is  sought  in  an  existing  corporation,  or  if  any  matter 
of  moment  arises,  it  is  better  to  consult  an  attorney 
of  ability  and  known  carefulness.  The  records  of 
any  corporation  should  be  full  and  complete,  its 
books  carefully  kept,  its  reports  to  state  officers 
faithfully  and  promptly  made.  This  book  endeavors 
to  show  the  nature  of  the  corporation,  the  nature  of 
its  charter  and  by-laws,  the  purpose  and  extent  of 
its  corporate  meetings  and  the  minutes  thereof,  the 
powers  and  duties  of  its  directors  and  executive 
officers,  and  all  matters  of  a  fundamental  nature  that 
apply  to  all  corporations  wherever  incorporated. 


TABLE   OF   CONTENTS. 


THE 
LAW  OF  CORPORATIONS. 

PART  I. 

CREATION  AND  ORGANIZATION  OF  CORPORATIONS. 

CHAPTER  1. 

DEFINITION  AND  GENERAL  EXPLANATION. 

Sec.     I.    Definition. 

Sec.    2.    Corporations  distinguished  from  partner- 
ships. 

Sec.    3.    Reasons  for  the  incorporation  of  business 
companies. 

(i)  The  liability  of  shareholders  is 
limited  to  the  amount  of  their 
subscriptions. 

(a)  The  members  of  a  corporation 
are  not  liable  for  the  unauthor- 
ized  acts  of  their  associates. 

(3)  The  corporate  form  affords  sta- 

bility and  permanency   of   or- 
ganization. 

(4)  Incorporation     encourages     sys- 

tematic organization. 
[(5)  The  incorporation  of  a  company 
often  furnishes  better  facilities 
for  raising  capital  and  borrow- 
ing money. 

(9) 


10  CORPOBATIONS. 

(6)  The  corporation  furnishes  a  legal 

unit    for     purposes     of     suit, 

holding  title,  making  contracts 

etc. 

Sec.    4.    General  power  of  corporation  to  contract 

and  to  commit  torts  and  crimes. 
Sec.     5.     Kinds  of  corporations. 
Sec.    6.    Purposes  for  which  corporations  may  be 
formed. 

CHAPTER  2. 

OF  THE   CORPORATE   CHARTER. 

Sec.    7.    Necessity  and  nature  of  charter. 

Sec.  8.  Power  of  state  and  federal  governments 
to  grant  charters. 

Sec.  9.  Power  of  state  to  alter  and  amend  char- 
ters. 

Sec.  10.     Form  of  charter — special  statute. 

Sec.  II.  Form  of  charter — certificate  or  statement 
under  general  law. 

Sec.  12.     Incomplete  and  defective  charter. 

Sec.  13.     Amendment  of  charter. 

CHAPTER  3. 

OP  THE  FORMATION  OF  THE  CORPORATION. 

Sec.  14.  In  general  of  the  subject-matter  of  this 
chapter. 

A.     In   Respect  to  Securing  the  Charter. 

Sec.  15.    Whether  to  incorporate. 
Sec.  16.    Where  to  incorporate. 


AMEBICAN  COMMERCIAL  LAW.  11 

Sec.  17.    Adoption  of  name. 

Sec.  18.     Procedure  necessary  to  obtain  charter. 

B.     In  Respect  to  Internal  Organization. 

Sec.  19.     First  meetings  and  election  of  directors 

and  officers. 
Sec.  20.     The  by-laws. 
Sec.  21.    Opening  of  corporate  books  and  records. 

(1)  In  general. 

(2)  The  minute  book. 

(3)  The  stock  certificate  book. 

(4)  The  stock  ledger. 

(5)  The  transfer  book. 

(6)  Corporate  calendar. 

(7)  Other  books. 

CHAPTER  *. 

THE    PROMOTER. 

Sec.  22.     Promoter  defined. 

Sec.  23.     Liability  of  corporation   for  acts  of  the 

promoter. 
Sec.  24.    The  promoter  in  a  position  of  trust. 

PART  H. 

STOCK  AND  STOCKHOLDERS. 

CHAPTER  5. 

DEFINITIONS  AND  KINDS  OF  STOCK. 

Sec.  25.    Definition  of  capital  stock  and  share  of 
stock. 


12  CoiiPOBATIONS. 

Sec.  26.  Common  and  preferred  stock. 
Sec.  27.  Unissued  and  treasury  stock. 
Sec.  28.  The  certificate  of  stock. 

CHAPTER  6. 

SUBSCRIPTION  TO  STOCK. 

Sec.  29.    Form,  manner  and  effect  of  subscribing  to 

stock. 

Sec.  30.     Fraud  in  securing  stock  subscriptions. 
Sec.  31.    Subscriptions  upon  condition. 

CHAPTER  7. 

PAYMENT  FOR  STOCK. 

Sec.  32.    Liability  upon  unqualified  subscription. 

Sec.  33.     Medium  of  payment. 

Sec.  34.     Definition  of  "watered  stock." 

Sec.  35.     Rights  of  creditors  respecting  payment  of 

stock  subscription. 
Sec.  36.     Calls  for  payment. 
Sec.  37.     Payment  required  by  statutes  as  a  right 

precedent  to  corporate  life. 
Sec.  38.    Forfeiture  of  stock  for  non-payment 

CHAPTER  8. 

RIGHTS  OF  STOCKHOLDERS. 

S«c.  39.    In  general. 


AMEEICAN  COMMERCIAL  LAW.  13 

A.     The  Rights  Growing  Out  of  the  Stockholder's 
Relationship,  as  such. 

Sec.  40.     Stockholder's  right  to  dividends. 

Sec.  41.  Right  of  stockholders  to  prevent  ultra 
vires  acts. 

Sec.  42.  Right  of  the  stockholder  to  prevent  a 
change  of  the  charter  in  material  re- 
spects. 

Sec.  43.  Right  of  stockholder  to  inspect  corporate 
books  and  records. 

B.     Rights  Growing  Out  of  Special  Contracts  Made  by 
Corporation  with  Stockholders. 

Sec.  44.  Right  of  stockholder  to  contract  and  deal 
with  corporation. 

Sec.  45.  Right  of  stockholder  to  contract  with  re- 
spect to  the  stock  subscription. 

CHAPTER  9. 

STOCKHOLDERS'  MEETINGS. 
A.     In  General. 

Sec.  46.    Right  of  stockholders  to  hold  and  attend 

meetings. 
Sec.  47.    Purpose  of  stockholders'  meetings. 

B.     Regular  and  Special  Meetings. 

Sec.  48.    The  annual  and  other  regular  meetings. 
Sec.  49.    Special  meetings. 

C.     Calls,  Notices  and  Waivers. 
Sec.  50.    Notice  of  annual  meeting. 


14  COBPOBATIONS. 

Sec.  51.    Call  and  notice  of  special  meeting. 
Sec.  52.    Waiver  of  notice  of  meetings. 

D.     Attendance  and  Vote. 

Sec.  53.  Attendance  may  be  in  person  or  by  proxy. 

Sec.  54.  Voting  powers  of  trustees,  executors,  ad- 
ministrators and  pledgees. 

Sec.  55.  Voting  trusts. 

Sec.  56.  Who  entitled  to  vote.    Closing  books. 

Sec.  57.  Calling  the  roll. 

Sec.  58.  Quorum. 

Sec.  59.  Right  to  cumulate  vote. 

E.     Organizing  the  Meeting  and  Transacting  Business. 

Sec.  60.     The  officers  of  the  meeting. 
Sec.  61.    Order  of  business. 
Sec.  62.    Adjournment. 

P.     Minutes  of  the    Meeting. 

Sec.  63.    Definition  of  minutes. 
Sec.  64.    Legal  effect  of  minutes. 
Sec.  65.    Approval  of  minutes. 

CHAPTER  10. 

TRANSFER  OF  STOCK. 

Sec.  66.    Trans ferability  of  stock. 

Sec.  67.    Method  of  transfer. 

Sec.  68.  By-laws  and  regulations  restricting  trans- 
fer. 

Sec.  69.  Rights  of  transferee  of  stock  sold  without 
authority. 

Sec  70.    Liability  of  transferee  to  corporation. 


AMERICAN  COMMERCIAL  LAW.  15 

Sec.  71.     Liability  of  transferee  to  creditors  of  the 

corporation. 
Sec.  72.     Liability  of  transferor  to  transferee. 

CHAPTER  11. 

DIVIDENDS. 

Sec.  73.  Definition  and  kinds. 

Sec.  74.  Declaration  of  dividends. 

Sec.  75.  Payment  of  dividends. 

Sec.  76.  Who  entitled  to  dividends. 

Sec.  77.  Dividends  upon  preferred  stock. 


PART  in. 

THE  DIRECTORS  AND  OTHER  OFFICERS  OF  A 
CORPORATION. 

CHAPTER  12. 

DIRECTORS. 
A.     The  Function  and  Composition  of  the  Directorate. 

Sec.  78.     The  directorate  defined. 

Sec.  79.     Qualifications     for    membership     in    the 

board. 

Sec.  80.     Election  of  directors. 
Sec.  81.     Right  to  remove  director  during  term. 

B.     The  Responsibility  and  Rights  of  the  Director. 

Sec.  82.    The  director's  responsibility  to  the  corpo 
ration. 


16  CORPOBATIONS. 

Sec.  83.    Liability  of  director  to  third  persons. 
Sec.  84.    Right  of  directors  to  profit  by  the  rela- 
tionship. 

C.  Powers  of  Directors. 

Sec.  85.    Various  powers  of  directors  considered. 

D.  Directors'    Meetings. 

Sec.  86.    In  general. 

Sec.  87.    Method  of  transacting  business  at  direc- 
tors' meeting. 
Sec.  88.    Minutes. 

CHAPTER  13. 

THE  ADMINISTRATIVE  OFFICERS  OF  THE  CORPORATION. 

Sec.  89.  Introductory. 

Sec.  90.  The  president. 

Sec.  91.  The  vice-president 

Sec.  92.  The  secretary. 

Sec.  93.  The  treasurer. 

Sec.  94.  In  general. 

Sec.  95.  Execution  of  contracts  by  officers  of  cor- 
poration. 


AMEBICAN  COMMEBCIAL  LAW.  17 

PART  IV. 

CREDITORS  OF  A  CORPORATION. 

CHAPTER  14. 

CORPORATE  BONDS  AND  MORTGAGES. 

Sec.  96.  Power  of  corporation  to  issue  bonds  and 

mortgages. 

Sec.  97.  Negotiability  of  corporate  bonds. 

Sec.  98.  Form  of  bonds. 

Sec.  99.  The  bond  security. 

Sec.  loo.  Remedies  of  bondholders. 

Sec.  101.  Other  indebtedness  of  a  corporation. 

CHAPTER  15. 

INSOLVENT   CORPORATIONS. 

Sec.  102.    Definition. 

Sec.  103.    The  trust  fund  doctrine. 

Sec.  104.  Right  of  insolvent  corporation  to  prefer 
creditors. 

Sec.  105.  Right  of  insolvent  corporation  to  make 
a  general  assignment. 

Sec.  106.    Rights  of  secured  and  lien  creditors. 

Sec.  107.  What  are  assets  of  the  corporation — 
stockholder's  unpaid  liability. 

Sec.  108.  Remedies  of  creditors  of  insolvent  cor- 
poration. 


18  COBPOBATIONS. 

PART  V. 

POWERS  OF  A  CORPORATION. 

CHAPTER  16. 

GENERAL    CONSIDERATION    OF    POWERS   OF   A    CORPORA- 
TION. 

Sec.  109.  Powers  classified.     Inherent  powers. 

Sec.  no.  Express  charter  powers. 

Sec.  in.  Implied  charter  powers. 

Sec.  112.  Notice  of  powers  of  corporation. 

Sec.  113.  Enforcement  of  contracts  ultra  vires. 

CHAPTER  17. 

CERTAIN  PARTICULAR  POWERS  CONSIDERED. 

Sec.  114.    Power  of  corporation  to  acquire  and  hold 

real  estate. 
Sec.  115.    Power  of  corporation  to  borrow  money 

and  mortgage  its  property. 

Sec.  116.     Power  of  corporation  to  loan  money. 
Sec.  117.     Power  of  corporation  to  sell  its  property. 
Sec.  118.     Power  of  corporation  to  acquire  shares 

in  other  corporations. 
Sec.  119.    Power  of  corporation  to  acquire  its  own 

shares. 


AMERICAN  COMMERCIAL  LAW.  19 

PART  VI. 

CHAPTER  18. 

FOREIGN   CORPORATIONS. 

Sec.  120.    Definition  and  general  statement. 

Sec.  121.  Common  provisions  in  respect  to  foreign 
corporations. 

Sec.  122.  What  constitutes  "doing  business"  in  an- 
other state. 

Sec.  123.  When  foreign  corporation  has  constitu- 
tional right  to  enter  another  state. 

Sec.  124.     Suit  against  foreign  corporations. 

PART  vn. 

CHAPTER  19. 

TRUSTS   AND    MONOPOLIES, 

Sec.  125.    A  "trust"  defined. 
Sec.  126.     Consolidation  of  corporations. 
Sec.  127.     Corporations   formed   to   monopolize   or 
restrain  trade. 


20  COBPORATIONS. 

PART  VIII. 

CHAPTER  20. 

DISSOLUTION  AND  WINDING  UP  OF  CORPORATIONS. 

Sec.  128.    Ways  in  which  a  corporation  may  be  dis- 
solved. 
Sec.  129.    Results  of  dissolution. 

APPENDIX  A. 

FORMS. 

APPENDIX  B. 

QUESTIONS    AND    PROBLEMS. 


THE  LAW  OF  PRIVATE 
BUSINESS     CORPORATIONS. 

PART  I. 

CREATION  AND  ORGANIZATION  OF  CORPORATIONS. 

CHAPTER  1. 

DEFINITION   AND   GENERAL    EXPLANATION. 

Sec.  1.  DEFINITION.  A  private  business  corpora- 
tion Is  an  artificial  person,  created  ar.d  existing  under 
and  by  virtue  of  the  franchise  of  the  state. 

For  the  encouragement  and  convenience  of  trade 
and  commerce  the  law  deems  it  expedient  to  permit 
the  organization  of  a  business  in  such  a  way  that  it 
shall  constitute  a  legal  entity  distinct  and  separate, 
as  such,  from  those  who  have  established  and  who 
conduct  it.  It  is  considered  that  it  should  be  pos- 
sible for  parties  to  have  a  commercial  enterprise  that 
shall  be  a  thing  apart  from  its  real  owners  so  that 
those  who  deal  with  it  must  look  to  it  alone  and  be 
bound  to  it  alone  for  the  performance  of  all  obliga- 
tions; that  as  an  organization  it  should  have  power 
to  hold  legal  title  to  property,  to  enter  into  contracts, 
to  sue  and  be  sued,  and  that  those  responsible  for 
it  as  an  enterprise,  should  not  be  responsible  upon 
its  contracts  or  for  its  debts. 

(21) 


22  CORPORATIONS. 

To  bring  this  about,  the  state  grants  a  franchise 
or  charter  permitting  men  to  organize  a  business 
having  an  identity  distinct  from  those  who  organize 
or  own  it.  Unless  this  franchise  or  charter  is  ob- 
tained, that  which  a  person  does  in  a  business  way 
is  that  which  he  does  as  a  person.  The  liability  is 
personal,  the  contracts  made,  whether  by  him  in 
person,  or  by  agents  for  him,  are  his  contracts,  and 
though  such  man  by  his  system  of  keeping  books 
regards  that  business  as  utterly  distinct  from  his 
home  or  other  personal  affairs,  and  distinct  from 
what  other  business  affairs  he  may  have,  yet  in  the 
law  no  such  distinction  can  be  made.  If  suit  is 
brought,  he  is  sued;  if  property  is  purchased,  he 
owns  it;  if  the  business  goes  into  bankruptcy,  he 
goes  into  bankruptcy.  And  what  is  true  of  him  if 
he  is  in  business  by  himself  is  also  true  of  him  if 
he  is  in  business  with  others  as  partners.  But  if 
this  charter  from  the  state  is  secured  the  business 
may  be  made  a  thing  apart,  as  above  explained. 

Chief  Justice  Marshall,  in  a  definition  which  has 
become  famous,  described  a  corporation  as  "an  ar- 
tificial being,  intangible,  invisible,  and  existing  only 
in  contemplation  of  law."1  This  definition  has  been 
criticised,  and  yet,  so  long  as  the  corporation  is  organ- 
ized and  conducted  for  legitimate  business  purposes, 
it  is  correct,  for  a  corporation  is  indeed  "an  artificial 
person"  which  exists  "only  in  contemplation  of  law." 
It  is  more  than  an  association  of  individuals.  In 
legal  theory,  it  is  an  entity,  and  as  such,  possesses 
many  of  the  attributes  of  a  natural  person;  and  it 

1.  Dartmouth  College  T.  Woodward,  4  Wheat.  (U.  8.) 
518,  636. 


AMERICAN  COMMERCIAL  LAW.  23 

stands  apart  from  all  other  members  of  the  com- 
munity, including  its  own  shareholders,  and  is  for 
proper  purposes  as  distinct  from  them  as  they  are 
from  each  other.  It  may  contract  with  them,  buy 
from  and  sell  to  them,  sue  them  and  be  sued  by 
them.  The  act  of  the  corporation  is  not  the  act 
of  its  shareholders;  its  liability  is  not  their  liability; 
its  assets  do  not  belong  to  them.  But  the  corpora- 
tion, as  such,  may,  like  a  natural  person,  acquire, 
hold  and  grant  property,  commit  torts  and  crimes, 
sue  and  be  sued. 

This  separate,  well  defined  existence  of  the  cor- 
poration is  a  legal  fiction  permitted  for  the  legiti- 
mate purposes  of  trade  and  commerce.  A  number 
of  men  are  seen  working  together;  they  are  using 
a  name  arbitrarily  chosen  by  them  for  their  com- 
mon designation  in  tradal  association ;  and  yet  they 
say  that  it  is  not  their  name,  but  the  name  of  an 
"artificial  person,"  for  whom  they  are  working, 
with  whom  they  have  a  contract,  from  whom  some 
of  them  draw  salaries  or  whose  profits  they  take  and 
divide  among  them.  Where  is  this  individual,  of 
whose  identity  they  are  so  sure?  It  does  not  think, 
will,  speak,  act,  except  through  them;  and  yet  it 
has  an  existence  that  stands  apart,  limited  and  cer- 
tain. 

It  is  because  the  state  gives  sanction  that  this  child 
of  the  imagination  can  come  forth  and  be  a  sub- 
stantial member  of  the  business  community.  Its 
legal  standing  is  derived  from  political  fiat;  and  this 
fiat  we  find  expressed  in  the  corporate  charter. 
Without  a  charter,  that  is  to  say,  without  the  fran- 
chise of  the  state,  there  cannot  be  a  corporation. 


24  COBPORATIONS. 

This  legal,  separate  existence  is  permitted  for  the 
convenience  and  the  encouragement  of  commerce. 
The  fiction  may  not  be  made  a  shield  for  illegal 
action.  While  the  members  of  a  corporation  are  not 
responsible  for  its  torts  which  they  do  not  sanction, 
or  its  crimes  which  they  have  no  part  in,  yet  if  they 
organize  it  in  order  to  shield  themselves  in  fraudu- 
lent or  other  illegal  devices,  hoping  by  this  legal 
fiction  to  escape  legal  responsibility,  the  courts  will 
seek  out  the  real  offenders  and  fix  the  responsibility 
and  visit  the  punishment  upon  them. 

Sec.  2.  CORPORATIONS  DISTINGUISHED  FROM 
PARTNERSHIPS.  A  partnership  is  not  a  legal  entity 
but  a  relationship  growing  out  of  a  contract  by  in- 
dividuals to  conduct  a  business  enterprise  as  the  co- 
owners  thereof,  sharing  the  profits  and  losses. 

A  partnership  is  a  combination  of  persons  whose 
rights  and  liabilities  are  governed  by  a  contract 
whereby  they  have  agreed  to  mutually  conduct  a 
business  as  the  co-owners  thereof,  sharing  the  prof- 
its and  losses.2  No  separate  individuality  in  the 
law  is  thereby  created.  A  relationship,  not  an  entity, 
has  been  established.  The  acts  of  the  partnership 
are  the  acts  of  its  members;  its  liability  is  their  lia- 
bility. Also,  the  partnership  has  no  charter  from 
the  state;  it  arises  by  mere  agreement  between  the 
parties. 

If  under  such  an  arrangement  corporation  organ- 
ization is  copied  and  the  capital  stock  is  made  a  fixed 
amount  and  divided  into  transferable  shares  which 
are  represented  by  certificates  issued  to  the  owners 

2.    See  "The  Law  of  Partnership"  in  this  Series. 


AMEKICAN  COMMERCIAL  LAW.  25 

thereof,  the  concern  is  known  as  a  joint  stock  com- 
pany. Such  a  concern,  having  no  charter  from  the 
state,  is  still  a  partnership  in  all  of  its  substantial 
legal  aspects,  and  the  liability  arising  is  the  liability 
of  the  members,  and  although  in  some  few  states 
statutes  have  been  passed  limiting  the  liability  of 
members  of  such  a  concern  provided  there  is  publi- 
cation, recording,  etc.,  of  various  papers,  yet  organ- 
ization in  this  form  is  not  common  inasmuch  as  it 
lacks  the  separate  legal  existence  usually  regarded 
as  the  chief  desideratum. 

Sec.  3.  REASONS  FOR  THE  INCORPORATION  OF 
BUSINESS  COMPANIES.  The  main  reasons  for  the 
incorporation  of  companies  are  to  secure  limitation  of 
personal  liability,  to  effect  a  more  permanent  and  sys- 
tematic organization,  and  In  cases,  to  secure  funds  or  a 
better  credit. 

We  may  now  consider  those  chief  considerations 
which  induce  men  to  incorporate  a  business.  We 
will  notice  in  a  later  section3  that  it  may  not  always 
be  desirable  to  incorporate,  yet  in  a  great  many  cases, 
especially  in  large  businesses,  the  considerations  in 
favor  of  incorporation  outweigh  those  which  are 
against  it.  Amplifying  the  black  letter  text,  we  may 
set  forth  a  number  of  distinct  considerations  which 
lead  parties  to  secure  a  charter. 

(1)  The  liability  of  shareholders  Is  limited  to  the 
amount  of  their  subscriptions. 

This  indeed  is  the  great  reason,  it  may  be  as- 
sumed, why  incorporation  is  desirable.  For,  under 
the  laws  of  the  various  states,  with  very  few  and 

9.    Section  15,  post. 


26  CORPORATIONS. 

narrow  exceptions;  the  par  value  of  the  stock  for 
which  one  subscribes  represents  the  total  amount 
that  he  may  be  called  upon  to  pay  either  by  the 
corporation  or  creditors  of  the  corporation.  When 
he  has  once  paid  that  amount,  his  liability  is  gone; 
no  further  sum  may  be  called  for,  no  assessments 
may  be  voted  against  him,  though  all  the  other  share- 
holders should  join  in  the  vote.3* 

In  a  partnership,  one's  liability  to  creditors  is  per- 
sonal and  unlimited.  Perhaps  by  agreement  the  other 
partners  have  no  right  to  call  for  more  than  a  cer- 
tain amount,  but  this  does  not  affect  creditors,  who 
may  out  of  the  assets  of  any  single  partner  collect 
their  judgments,  leaving  such  partner  to  reimburse- 
ment by  his  associates  for  their  share  of  the  debt, 
who,  being  absent  or  becoming  insolvent,  may 
not  be  responsible.  If  one  deals  with  the  firm  of 
A,  B,  &  C,  he  may  know  that  his  claims  are  collect- 
ible so  long  as  any  member  of  that  firm  remains 
solvent. 

(2)  The  members  of  a  corporation  are  not  liable 
for  the  unauthorized  acts  of  their  associates. 

There  is  a  rule  in  the  law  of  agency  that  a  prin- 
cipal is  not  only  responsible  for  the  acts  and  con- 
tracts which  he  really  authorized  but  for  those  also 
which  he  seems  to  have  authorized.  He  will  be  made 
liable  for  all  acts  done  and  contracts  made  within 
the  scope  of  the  agent's  apparent  authority. 

An  agent  has  apparent  authority  to  do  all  those 
things  which  one  would  reasonably  expect  an  agent 
to  have  authority  to  do  from  the  position  in  which 

3a.  In  California  and  one  or  two  other  states  fully  paid 
capital  gtock  may  be  assessed. 


AMEBICAN  COMMEBCIAL  LAW.  27 

the  principal  has  placed  him.  A  special  agent  has 
very  limited  authority,  but  an  agent  whose  authority 
is  of  a  general  nature  may  be  expected  to  have  all 
the  authority  that  is  reasonably  necessary  to  carry 
on  the  work  which  he  is  in  charge  of — such  authority 
as  persons  in  that  situation  usually  have. 

Consequently  principals  are  often  bound  upon  con- 
tracts made  by  agents  which  are  entered  into  by  the 
agent  without  any  real  authority  or,  perhaps,  even 
against  express  instructions.  If  the  agent  seems 
from  his  position — the  position  in  which  the  princi- 
pal has  placed  him — to  have  authority,  a  third  person 
is  justified  in  believing  that  he  has  such  authority. 

Now  it  is  true  that  this  rule  applies  in  its  full 
force  in  respect  to  corporations,  and  the  corporation 
may  be  bound  by  the  acts  of  a  general  agent  which 
are  not  within  his  real  authority,  but  it  is  the  cor- 
poration which  is  bound  and  not  the  shareholders. 
Now  if  one  is  conducting  a  business  which  is  not 
incorporated  he  is  conducting  it  as  a  partner  or  as 
sole  owner.  If  he  is  in  a  partnership,  each  of  his 
partners  is  a  general  agent  of  the  others  and  as 
such,  has  a  large  apparent  authority,  and  thus  may 
bind  the  others  upon  acts  which  their  own  discretion 
would  have  forbidden.  And  if  one  is  not  a  partner  in 
a  business,  but  the  sole  owner  thereof,  still  he  may 
have  agents  and  servants  to  help  him  conduct  it.  But 
shareholders  in  a  corporation  are  neither  agents  of 
the  corporation  nor  of  the  other  shareholders,  and 
consequently  neither  the  corporation  nor  the  share- 
holders are  responsible  for  the  acts  and  contracts 
attempted  to  be  made  by  the  other  shareholders  as 
agents  of  the  corporation  unless  there  has  been  some 
special  appointment  whereby  such  shareholders  be- 
came also  agents. 


28  COBPOBATIONB. 

It  is  likewise  a  law  of  agency  that  a  principal  is 
responsible  for  the  torts  of  his  agent  or  servant 
committed  within  the  scope  of  the  authority  and 
this  rule  makes  one  whose  business  is  unincorporated 
responsible  for  negligence,  fraud  ind  other  torts  of 
his  agents  and  servants,  and  of  his  partners,  if  he 
have  partners. 

The  incorporation  of  a  company  creates  a  new  per- 
son who  shall  stand  as  the  principal  upon  the  con- 
tracts made  in  its  name  by  its  agents  and  for  the 
torts  of  its  agents  and  servants ;  and  incorporation 
thus  serves  to  limit  liability  in  this  respect. 

(3)  The  corporate  form   affords  stability   and    per- 
manency  of  organization. 

The  death  of  the  owner  of  a  business,  or  of  one 
of  the  partners  in  a  business,  necessitates  a  reorgan- 
ization if  the  business  is  to  continue.  And  where 
a  business  is  owned  by  several  as  partners,  none  of 
them  has  any  right  to  transfer  his  interest  without 
the  consent  of  all  the  others  and  such  transfer  with- 
out consent  results  in  dissolution.  But  corporate 
shares  are  freely  transferable,  and  the  sale  of  shares 
or  the  death  of  a  shareholder  does  not  in  any  sense 
affect  the  existence  of  the  corporation. 

(4)  Incorporation   encourages  systematic   organiza- 
tion. 

It  can  readily  be  seen  that  the  incorporation  of  a 
company  means  in  itself,  almost  necessarily,  a  sys- 
tematic organization.  The  very  permanency  of  the 
corporate  life  encourages  the  introduction  and  main- 


AMERICAN  COMMERCIAL  LAW.  29 

tenance  of  system.  Officers  are  to  be  elected,  the 
authority  of  each  one  of  them  is  to  be  determined, 
by-laws  are  to  be  adopted,  shares  are  to  be  issued, 
and  all  of  this  encourages  systematic  organization. 

(5)  The   Incorporation   of    a    company    often    fur- 
nishes better  facilities  for  raising  capital  and  borrow- 
ing   money. 

Many  a  person  will  become  a  subscriber  to  shares 
of  stock  who  would  not  in  that  particular  business 
take  upon  himself  the  more  onerous  liability  of  a 
partner.  Corporate  shares  may  therefore  be  sold 
where  shares  in  the  same  business  unincorporated 
would  go  begging.  This  is  a  matter  of  every  day 
observation.  And  capital  may  be  secured  also  by 
the  issuance  of  preferred  shares,  defined  and  de- 
scribed later  in  the  text,  which  give  the  holder  a 
certain  assurance  of  return  of  a  certain  amount. 
So  the  corporate  form  becomes  a  necessity  if  the 
borrowing  of  money  is  to  be  accomplished  through 
a  bond  issue,  which  may  be  widely  distributed  and 
yet  every  bondholder  have  his  security  in  the  same 
trust  deed  or  mortgage  upon  the  property  of  the 
borrower. 

(6)  A  corporation  furnishes  a  legal  unity  for  pur- 
poses of  suit,  holding  title,  making  contracts,  etc. 

This  is  a  matter  of  great  convenience  especially 
where  the  corporation  is  of  any  considerable  size 
or  has  many  interested  in  it. 


80  CORPORATIONS. 

See.  4.  GENERAL  POWER  OF  CORPORATIONS  TO 
CONTRACT  AND  TO  COMMIT  TORTS  AND  CRIMES. 

A  corporation  may  enter  Into  all  contracts  which  fairly 
tend  to  accomplish  its  corporate  purposes,  and  such 
contracts  bind  the  corporation  the  same  as  contracts 
made  by  natural  persons  bind  them;  but  it  has  no 
power  to  make  other  contracts.  A  corporation  ha*  the 
power  to  commit  torts  and  crimes. 

We  will  hereafter  consider  in  detail  to  what  ex- 
tent a  corporation  may  enter  into  contracts  and  the 
results  which  follow  where  it  attempts  to  make  con- 
tracts which  it  has  no  right  to  make,  and  so  at  this 
point  for  the  purpose  of  our  better  understanding 
of  the  nature  of  a  corporation  may  simply  note 
that  a  corporation  is  a  competent  party  to  any  con- 
tract made  for  the  purpose  of  carrying  out  its  char- 
ter powers,  and  these  contracts  are  binding  upon  it 
as  a  legal  entity  in  the  same  manner  as  contracts  are 
binding  upon  natural  persons,  and  they  are  not  bind- 
ing upon  the  officers  who  make  the  contract  for  the 
corporation,  or  upon  the  shareholders  for  whose 
ultimate  benefit  the  contract  is  made.  This  follows 
from,  as  it  is  the  purpose  of,  the  theory  of  the  sep- 
arate existence  of  the  corporation  as  an  entity. 

A  corporation  has  only  those  powers  which  are 
expressly  or  impliedly  given  to  it  in  its  charter.  Its 
power  to  enter  into  contract  is  governed  by  the 
terms  of  its  charter.  A  natural  person  can  make 
any  contract  so  long  as  it  is  not  illegal  or  against 
public  policy.  But  a  corporation  can  only  make 
those  contracts  which  fairly  tend  to  contribute  to 
the  carrying  on  of  the  business  which  it  is  authorized 
to  do  by  its  charter. 


AMEBICAN  COMMEBOIAL  LAW.  31 

A  corporation  has  the  power  to  commit  torts  and 
may  be  sued  for  the  damages  thereby  caused.  For 
illustration,  corporations  may  be  guilty  of  defama- 
tion, conspiracy,  conversion  of  another's  property, 
negligence;  and  so  on. 

Of  course  the  corporation  is  not  responsible  for 
those  torts  of  its  agents  and  servants  which  are 
committed  by  them  independently  of  their  employ- 
ment, or,  as  it  is  said,  not  within  the  scope  of  their 
authority  or  employment.  A  corporation  is  answer- 
able for  those  torts  committed  by  its  agents  and 
servants  which  any  other  principal  would  be  respon- 
sible for.  In  other  words,  the  general  law  of  agency 
governs  this  subject  and  a  corporation  is  liable  for 
the  acts  of  its  representatives  under  the  same  rules 
that  would  govern  the  responsibility  of  any  other 
principal. 

A  corporation  may  likewise  be  guilty  of  crimes 
and  be  punished  by  way  of  fine.  It  may,  for  in- 
stance, violate  speed  ordinances,  adulterate  foods, 
enter  into  criminal  conspiracies,  give  illegal  rebates, 
etc. 

See.  5.  KINDS  OF  CORPORATIONS.  Corporations 
may  be  divided  Into  public  or  municipal  corporations 
and  private  corporations.  The  latter  may  again  be 
divided  Into  stock  and  non-stock  corporations. 

We  may  classify  corporations  as  follows: 
(i)     Public  corporations  or  such  as  are  founded  by 
the  government  for  public  purposes. 

A.  Municipal,  as  cities  and  towns. 

B.  Quasi  municipal,  as  counties,  school 

districts,  etc. 


32  CORPORATIONS. 

(2)  Private  corporations,  or  corporations  owned  by 
private  individuals,  although  perhaps  of  a 
public  nature. 

A.  Stock     corporations,     organized     for 

purposes  of  financial  profit.  Rail- 
roads, street  railways  and  the  like 
are  private  corporations,  though 
sometimes  called  public  or  quasi 
public.  Under  this  heading  fall  all 
companies  organized  for  profit. 

B.  Non-stock  corporations  organized  for 

purposes  of  charity,  learning,  pleas- 
-  ure,  mutual  assistance,  etc. 

We  see  by  the  above  tabulation  that  the  theory 
of  corporate  organization  is  made  use  of  for  many 
purposes  quite  dissimilar.  We  shall  find  opportu- 
nity in  the  present  text  to  discuss  only  private  busi- 
ness corporations. 

Sec.  6.  PURPOSES  FOR  WHICH  CORPORATIONS 
MAY  BE  FORMED.  A  corporation  may  be  formed  for 
almost  any  legitimate  purpose.  But  It  may  In  any 
state  be  against  the  policy  of  the  law  to  permit  cor- 
porations to  engage  In  certain  activities  which  may  be 
carried  on  by  Individuals  and  unincorporated  com- 
panies. 

It  is  a  usual  provision  of  the  corporation  laws  in 
the  various  states  that  companies  may  be  incorpo- 
rated to  carry  on  any  lawful  business.  And  gen- 
erally it  may  be  said,  that  whatever  may  be  done 
in  a  business  way  by  natural  persons  may  also  be 
done  by  the  artificial  person  or  corporation.  But 
there  must  be  some  exceptions  made  to  this  state- 


AMERICAN  COMMEBCIAL  LAW.  33 

ment.  It  is  against  the  policy  of  the  laws  of  some 
states  to  permit  corporations  to  engage  in  certain  ac- 
tivities. For  instance,  under  the  laws  of  the  state 
of  Illinois,  a  corporation  may  not  be  organized  for 
the  main  purpose  of  dealing  in  real  estate  (although, 
of  course,  when  formed  for  other  purposes  it  may 
own  all  the  real  estate  reasonably  necessary  or  con- 
venient for  its  corporate  purposes).  It  is  also 
declared  to  be  against  the  policy  of  that  state  to  per- 
mit corporations  to  own  shares  in  other  corporations 
for  the  purpose  of  controlling  such  other  corpora- 
tions. A  recent  decision  in  the  state  of  New  York 
is  to  the  effect  that  corporations  cannot  be  organ- 
ized in  that  state  for  the  purpose  of  engaging  in  the 
practice  of  the  law.4 

Eliminating  the  few  and  narrow  exceptions 
which  the  policy  of  the  state  may  create,  we  may 
state  the  general  rule  to  be  that  corporations  may 
be  formed  to  carry  on  any  line  of  legitimate  busi- 
ness. 

4.    Re  Co-operative  Law  Co.,  198  N.  Y.  479. 


•  B— a 


CHAPTER  2. 


OF  THE  CORPORATE  CHARTER. 

See.  7.  NECESSITY  AND  GENERAL  NATURE  OP 
CHARTER.  A  charter  Is  necessary  to  corporate  ex- 
istence; the  terms  of  that  charter  determine  the  scope 
of  the  corporate  existence. 

We  have  already  noticed  that  a  corporation  exists 
by  virtue  of  the  grant  and  permission  of  the  state, 
as  expressed  in  the  charter  and  otherwise  cannot 
exist.  And  just  as  the  charter  is  the  evidence  of 
the  right  to  exist,  so  it  is,  by  the  same  token,  the 
evidence  of  the  scope  or  breadth  of  the  corporate 
existence.  We  must  look  to  the  charter  to  discover 
the  powers  of  the  corporation. 

The  subject  of  the  powers  of  the  corporation  is 
taken  up  hereafter.  Therefore  we  need  only  to  no- 
tice at  this  point  in  a  general  way  that  a  corporation 
has  those  powers  which  are  expressly  granted  to  it 
in  its  charter,  and  furthermore,  all  powers  which 
by  reasonable  inference  are  necessary  in  order  to 
carry  its  expressly  granted  powers  into  execution; 
and  it  has  no  further  powers  than  these. 

In  drafting  the  charter  great  care  should  be  taken 
in  the  statement  of  the  powers  or  objects  of  the  cor- 
poration, so  that  it  may  not  be  hampered  in  its  ac- 
tivities; yet  it  is  not  necessary,  and  indeed  it  is  not 
usual  or  good  practice,  to  set  out  those  powers  which 
arise  by  clear  implication.  Thus,  it  need  not  be 

(34) 


&MEBICAN  COMMEBOIAL  LAW.  85 

stated  that  the  corporation  shall  have  power  to  own 
a  plant  by  which  to  conduct  its  business,  that  it  shall 
have  power  to  enter  into  contracts,  to  buy  and  sell, 
to  borrow  money,  to  employ  clerks,  give  notes,  etc. 

A  statement  of  the  objects  of  a  corporation  as 
they  may  be  set  forth  in  the  charter  is  given  in  the 
appendix  by  way  of  illustration. 

The  usual  charter  provisions  are  in  respect  to  (i) 
the  name;  (2)  the  objects  of  the  corporation;  (3) 
the  amount  of  capital  stock;  (4)  the  number  and 
amount  of  shares;  (5)  the  duration  of  life;  (6) 
the  location  of  the  principal  office. 

Sec.  8.  POWER  OF  THE  STATE  AND  FEDERAL 
GOVERNMENTS  TO  GRANT  CHARTERS.  The  general 
power  to  Incorporate  companies  la  retained  by  the 
states.  The  federal  government,  however,  has  power  to 
grant  charters  when  it  may  thereby  reasonably  accom- 
plish some  end  In  the  performance  of  the  powers  ex- 
pressly granted  in  the  constitution. 

Our  federal  government  is  a  government  whose 
powers  are  said  to  consist  in  a  grant.  The  federal 
constitution  is  the  expression  of  that  grant.  What- 
ever power  is  not  thereby  granted  is  retained  by 
the  states.  Whenever  we  desire  to  know  whether 
the  federal  government  has  a  certain  power,  we  must 
look  to  the  federal  constitution  to  see  whether  that 
power  has  been  given.  Yet  it  is  a  well-known  rule 
of  construction  applicable  to  the  federal  constitution 
that  all  powers  are  thereby  given  which  are  by  rea- 
sonable inference  necessary  to  carry  the  expressly 
given  powers  into  execution.  These  are  the  implied 
powers.  Just  as  a  state  in  granting  a  corporate  char- 
ter grants  some  powers  by  implication,  so  the  states, 


36  CoBPOfiATIOtfS. 

in  granting  power  to  the  federal  government,  gave 
therewith  all  those  powers  which  by  reasonable  and 
fair  implication  are  necessary  to  a  proper  and  un- 
hampered exercise  of  the  powers  expressly  granted. 
The  federal  constitution  says  nothing  in  reference 
to  the  power  to  grant  charters  to  corporations.  Ac- 
cordingly we  may  at  once  conclude  that  the  federal 
government  has  no  power  to  grant  chaiters  as  one 
of  its  functions.  It  cannot  incorporate  companies 
with  that  end  alone  in  view.  Yet  it  has  been  decided 
that  where  it  may  make  use  of  an  incorporated  com- 
pany as  a  vehicle  reasonably  adapted  to  carry  its 
express  powers  into  execution,  it  may  create  such 
corporations  for  that  purpose.  Thus  in  order  to 
carry  out  its  extensive  fiscal  powers,  it  may  charter 
a  National  Bank.8 

Sec.  9.  POWER  OF  STATE  TO  ALTER  AND  RE- 
PEAL  CHARTERS.  The  charter  is  a  contract,  and  can- 
not be  repealed  or  altered  by  the  state  except  upon  a 
reservation  of  that  right  by  the  state  at  the  time  it 
grants  the  charter. 

It  was  early  decided,  in  the  famous  case  of  Dart- 
mouth College  vs.  Woodward,6  by  the  United  States 
Supreme  Court,  that  a  charter  granted  by  the  state 
is  a  contract  by  the  state  with  the  incorporators  and 
their  successors.  The  federal  constitution  provides 
that  no  state  shall  pass  any  law  impairing  the  obli- 
gation of  contracts,  and  this  provision,  as  decided 

5.  MeCulloch  v.  Maryland,  4  Wheat.  316.     So  it  has  been 
held  that  under  the  interstate  commerce  powers,  Congress  may 
incorporate  a  railroad.     California  v.  P.  R.  R.,  127  U.  S.  4. 

6.  4  Wheat.  (U.  S.)   518. 


AMERICAN  COMMERCIAL  LAW.  37 

in  the  case  mentioned,  prevents  the  state  from  al- 
tering or  repealing  a  charter  without  the  consent  of 
all  concerned  unless  the  right  to  alter  or  repeal  was 
reserved  beforehand. 

This  decision  was  followed  by  the  enactment  of 
constitutional  provisions  and  statutes  in  all  of  the 
states  that  whenever  a  charter  should  be  thereafter 
granted  it  should  be  granted  subject  to  a  right  re- 
served by  the  state  to  alter,  amend,  or  repeal  such 
charter  at  pleasure.  By  this  means  the  states  early 
overcame  the  effect  of  that  decision  in  respect  to 
corporations  thereafter  to  be  formed,  and  the  vast 
majority  of  corporations  now  existing  hold  their 
charters  subject  to  a  provision  of  that  sort  and  the 
states  may  change  their  general  corporation  laws 
at  any  time  to  affect  not  only  future  corporations 
but  also  all  those  existing  ones  which  have  secured 
their  charters  after  the  enactment  of  these  general 
reservations  of  power. 

Sec.  10.  FORM  OF  CHARTER — SPECIAL  STATUTE. 
The  early  mode  of  Incorporation  was  by  the  enactment 
of  a  private  statute,  passed  at  the  Instance  of  those  who 
desired  a  charter.  This  special  law  constituted  the 
charter. 

Tn  earlier  times,  by  a  method  now  obsolete,  when 
incorporation  was  desired,  application  was  made  to 
the  legislature  by  the  incorporators  for  the  enact- 
ment of  a  special  law  creating  the  corporation.  Such 
special  law  constituted  the  charter,  and  there  are 
many  corporations  in  existence  today  which  have 
such  a  charter.  Such  charters  cannot  be  amended 
or  taken  away,  if  secured  prior  to  the  enactment  of 
the  general  laws  mentioned  in  section  9. 


38  COBPOBATIONB. 

Sec.  11.  FORM  OF  CHARTER — CERTIFICATE  OR 
STATEMENT  UNDER  THE  GENERAL  CORPORATION 
LAW.  The  constitutions  and  statutes  of  the  various 
states  require  the  Incorporation  of  commercial  com- 
panies under  general  corporation  laws  applicable  alike 
to  all  similarly  situated.  The  certificate  or  statement 
made  or  procured  under  such  a  law  together  with  all 
of  the  provisions  of  the  general  law  applicable  thereto, 
constitutes  the  charter. 

Constitutional  provisions  and  statutes  of  the  vari- 
ous states  now  quite  generally  forbid  the  incorpora- 
tion of  companies  by  special  legislation.  In  all  of  the 
states  general  corporation  laws  are  in  force  which 
provide  that  corporations  may  be  created  by  com- 
pliance with  certain  requirements.  Usually  it  is  re- 
quired that  a  statement  or  certificate  shall  be  made 
and  recorded  with  certain  officers,  as  for  instance, 
the  secretary  of  state,  or  the  county  recorder,  or 
both,  which  shall  set  forth  the  name,  objects,  capital- 
alization  and  various  other  details  of  the  proposed 
corporation. 

To  be  exact,  the  charter  of  a  company  organized 
under  present  laws  consists  in  this  certificate,  in 
which  may  be  supposed  to  be  embodied  all  of  the 
general  laws  of  the  state  which  govern  the  particular 
corporation.  Thus  for  example  if  a  corporation  in 
the  state  of  Illinois  is  formed  by  filing  the  proper 
papers  and  receiving  the  certificate  which  shows 
compliance,  the  general  law  of  the  state  which  for- 
bids corporations  holding  shares  in  other  corpora- 
tions for  the  purpose  of  controlling  such  other  cor- 
porations, becomes  a  part  of  the  charter,  as  much  as 
though  written  therein. 


39 


Also,  whatever  in  the  proceeding  to  incorporate 
is  contrary  to  the  general  law,  is  void.  Thus,  in 
Illinois,  for  example,  if  the  statement  of  incorpora- 
tion states  that  the  object  of  the  incorporation  is 
to  deal  in  real  estate,  such  statement  is  nugatory, 
because  contrary  to  the  law  in  Illinois  which  for- 
bids corporations  to  be  organized  for  that  purpose; 
though  the  secretary  of  state  makes  no  objection  and 
issues  a  Certificate  of  Complete  Organization.  The 
state  laws  classify  corporations  into  several  classes. 
There  is,  first,  the  general  business  corporation  law 
under  which  corporations  engaged  in  usual  business 
activities  must  be  incorporated.  There  are  other 
general  laws,  applying  to  railroad  corporations, 
surety  companies,  banks,  insurance  companies.  These 
classes  of  corporations  have  peculiarities  which  make 
it  advisable  for  particular  statutes  to  apply  to  them. 
In  all  these  cases  however  a  general  law  governs, 
under  which  application  for  a  charter  must  be  made 
and  under  which  the  corporation  must  conduct  its 
business. 

Sec.  12.  INCOMPLETE  AND  DEFECTIVE  CHAR- 
TER. If  the  organization  Is  defective,  that  Is,  not 
legally  complete,  It  still  may  have  progressed  to  an 
extent  sufficient  to  give  the  company  legal  standing  as 
a  corporate  body  for  the  purpose  of  transacting  busi- 
ness and  Incurring  liabilities. 

It  would  give  rise  to  great  confusion  and  accom- 
plish much  more  harm  than  good  if  it  could  be  said 
that  every  defect  or  incompleteness  of  organization 
or  failure  to  comply  with  every  law  governing  the 
regular  standing  of  corporations  should  defeat  cor- 
porate existence.  The  law  is,  that  if  there  is  a 


40  CORPORATIONS. 

statute  under  which  incorporation  can  be  had,  and 
an  attempt  to  incorporate  thereunder,  and  actual  use 
of  the  charter,  there  is  a  corporation  for  all  practi- 
cal purposes.  The  corporation  is  said  then  to  be  de 
•facto.  If  its  legal  organization  is  perfect  it  is  said 
to  be  a  corporation  de  jure.  To  make  a  corporation 
de  facto  there  must  be  at  least  the  three  things  men- 
tioned, the  law  under  which  a  company  of  the  kind 
as  the  one  in  question  could  have  been  incorporated, 
a  bona  fide  attempt  to  incorporate  under  that  law, 
and  user.  If  such  has  been  the  case,  the  corpora- 
tion may  sue  and  be  sued  as  such,  make  contracts, 
hold  titles  and  act  in  all  respects  for  business  pur- 
poses as  though  fully  organized.  And  those  who 
compose  it  are  no  more  liable  for  its  debts  than  if 
it  were  de  jure.  Consequently  if  parties  are  sued, 
and  reply  that  they  are  not  personally  liable  be- 
cause acting  as  a  corporation,  it  is  sufficient  for  them 
to  prove  the  de  facto  existence  of  the  corporation. 
And  if  a  corporation  sues  and  the  answer  is  made 
that  it  is  not  a  corporation,  it  is  sufficient  if  it  reply 
that  it  is  a  corporation  de  facto. 

So  long,  however  as  the  corporation  is  not  de 
jure,  it  may  be  attacked  by  the  state  in  a  suit  to  dis- 
solve it  for  non-compliance  with  the  law,  or  to  com- 
pel its  compliance. 

One  must  bear  in  mind,  however,  that  in  no  case 
nor  for  any  purpose  can  a  corporation  exist  except 
upon  a  bona  tide  attempt  to  comply  with  the  corpora- 
tion law,  and  a  substantial  compliance  therewith. 
Merely  to  act  as  a  corporation  cannot  constitute  a 
corporation. 


AMEBICAN  COMMEBOIAL  LAW.  41 

Sec.  13.  AMENDMENT  OF  CHARTER.  The  corpo- 
ration laws  permit  the  members  of  a  corporation  to 
secure  amendments  to  the  charter  by  complying  with 
their  provisions  In  that  respect. 

The  law  permits  the  amendment  of  the  corporate 
charter  and  sets  out  how  such  amendment  may  be 
brought  about.  Thus,  the  name,  the  amount  of  cap- 
italization, the  objects,  may  all  be  changed  by  proper 
procedure.  These  changes  must  all  be  recorded  sub- 
stantially as  the  original  charter  so  that  there  may 
be  notice  of  them  by  all  concerned.  Application  for 
such  change  must  be  made  usually  to  the  same  officer 
as  application  for  an  original  charter,  and  certain 
fees  paid  to  the  state. 

Of  course  the  amendment  must  be  secured  under 
the  laws  of  the  same  state  which  granted  the  charter. 

We  are  not  now  concerned  with  the  right  of  min- 
ority stockholders  to  resist  such  changes.  That  is 
considered  later. 

When  the  charter  of  a  corporation  is  amended  to 
increase  its  capital  stock,  the  present  shareholders 
are  entitled  to  share  pro  rata,  if  they  desire,  in  the 
increase. 


CHAPTER  3. 


OF  THE  FORMATION  OF  THE  CORPORATION. 

Sec.  14.  IN  GENERAL  OF  THE  SUBJECT-MATTER 
OF  THIS  CHAPTER.  This  chapter  discusses  certain 
points  In  respect  to  the  formation  of  a  corporation,  but 
leaves  certain  other  points  In  respect  thereto  for  more 
appropriate  treatment  at  other  points  throughout  tha 
text. 

In  this  chapter  we  will  take  up  a  number  of  points 
in  respect  to  the  formation  of  a  corporation,  but 
will  leave  certain  points  that  might  appropriately 
be  discussed  here  to  later  treatment,  as  for  instance, 
the  subscription  to  stock  to  a  separate  chapter  in 
the  part  on  stock  and  stockholders.  This  chapter 
is  divided  into  two  parts.  The  first  deals  with  the 
procedure  necessary  to  secure  a  charter,  with  some 
remarks  upon  the  advisability  of  incorporating  and 
the  choice  of  the  state  of  incorporation.  The  second 
part  deals  with  such  points  upon  the  internal  or- 
ganization as  are  not  more  conveniently  treated  else- 
where. 

A.     In  Respect  to  Securing  the  Charter. 

Sec.  15.  WHETHER  TO  INCORPORATE.  In  each 
particular  Instance  the  peculiar  circumstances  that  pre- 
vail must  be  taken  Into  consideration  to  determine 


AMERICAN  COMMERCIAL  LAW.  43 

whether  the  corporate  form  Is  or  Is  not  the  most  ad- 
visable for  that  particular  business. 

We  have  heretofore  noted  the  reasons  upon  which 
businesses  are  incorporated,  but  it  by  no  means  fol- 
lows that  it  is  the  wisest  plan  to  incorporate  every 
business.  If,  for  instance,  a  business  is  quite  small, 
especially  if  it  is  not  owned  by  several  partners,  there 
would  usually  seem  to  be  no  good  reason  for  incur- 
ring the  expense  or  going  to  the  trouble  to  incorpo- 
rate. Especially  would  that  be  so  if  the  conduct  of 
the  business  was  the  main  occupation  of  the  owner 
and  not  a  side  line  managed  or  conducted  for  him 
by  others.  Against  the  advantages  which  follow  in- 
corporation may  be  mentioned  a  number  of  disad- 
vantages. A  stockholder  in  a  corporation  does  not 
have  that  immediate  and  direct  control  over  the  busi- 
ness which  a  partner  has.  The  stockholder,  as  we 
have  noted,  is  not  even  an  agent  of  the  corporation, 
unless  specially  made  such  agent ;  but  a  partner  is  an 
agent  of  very  general  and  wide  powers.  He  has  a 
right  to  both  a  voice  and  a  hand  in  the  management. 
So  it  is  a  fundamental  principle  of  the  law  of  part- 
nership that  the  relation  is  a  highly  personal  one.  No 
partner  can  by  transfer  of  his  interest  put  any  one  in 
his  stead.  No  one  can  even  withdraw  without  giv- 
ing each  other  partner  the  right  to  demand  a  winding 
up  of  the  business.  But  stock  in  a  corporation  may 
be  freely  transferred  unless  it  has  been  agreed  other- 
wise, and  even  then  a  stranger  who  buys  stock  is 
not  subject  to  such  restrictive  agreement  unless  he 
has  knowledge  of  it,  and  so  might  come  in  notwith- 
standing any  such  agreement.  It  is  to  be  remem- 
bered also  that  corporations  are  subject  to  many 


44  CORPORATIONS. 

drastic  laws  in  respect  to  taxation,  publicity,  filing 
reports,  etc.,  which  have  no  application  to  partner- 
ships, or  to  a  person  conducting  an  unincorporated 
business.  It  is  to  be  noted  therefore,  that  there  are 
often  some  things  to  be  said  in  favor  of  not  incor- 
porating. It  is  true  that  if  a  business  is  very  exten- 
sive and  many  times  also  where  it  is  quite  small, 
the  advantages  of  incorporating  often  greatly  out- 
weigh other  considerations.  This  is  especially  true 
because  of  the  limitation  of  liability  which  follows 
incorporation,  and  that  limitation  probably  furnishes 
the  greatest  incentive  to  incorporate. 

Sec.  16.  WHERE  TO  INCORPORATE.  As  a  gen- 
eral  rule  it  is  better  to  incorporate  In  the  state  In  which 
the  operations  of  the  corporation  are  to  be  centered, 
but  for  special  reasons  it  may  be  better  to  seek  some 
other  state  whose  laws  are  more  liberal  In  certain  re- 
spects, or  where  special  provisions  apply. 

Having  decided  to  incorporate,  the  question  of  the 
choice  of  the  state  then  arises.  If  the  business  of 
the  corporation  is  local  and  it  is  carrying  on  one 
of  the  ordinary  staple  lines  of  business,  and  the  cap- 
ital is  all,  or  in  large  part,  paid  in,  the  state  of  in- 
corporation should  be  the  state  in  which  the  opera- 
tions of  the  company  are  carried  on  or  center.  This 
may  result  in  incorporation  under  laws  more  drastic 
than  those  of  some  other  state,  and  may  subject  the 
incorporators  to  larger  fees  than  they  would  other- 
wise have  to  pay,  but  these  disadvantages  are  offset 
by  the  fact  that  the  company  is  incorporated  under 
the  laws  of  the  state  where  it  does  its  business.  For, 
if  it  is  not  incorporated  under  the  laws  of  the  home 


AMERICAN  COMMERCIAL  LAW.  45 

state,  it  is  a  foreign  corporation  in  the  state  in  which 
it  must  look  for  its  most  important  protection,  and 
as  such  foreign  corporation  it  is  subject  to  all  of 
the  foreign  corporation  laws,  more  or  less  severe, 
of  the  state  where  it  has  its  home.  Furthermore, 
incorporation  in  such  other  state  means  that  there 
must  be  constant  compliance  with  the  perhaps  chang- 
ing laws  of  that  state,  the  keeping  of  the  necessary 
agents  and  the  holding  of  the  necessary  meetings 
there,  and  so  on. 

Perhaps,  however,  the  corporation  is  to  be  organ- 
ized for  a  much  larger  capitalization  than  can  be  at 
present  paid  up,  or  perhaps  all  stock  is  not  at  pres- 
ent to  be  subscribed,  and  the  requirements  of  the 
home  state  in  these  and  similar  regards  cannot  be 
met,  or  perhaps  the  operations  of  the  company  are 
to  cover  many  states,  with  branches  in  numerous 
cities,  and  stockholders  widely  scattered,  or  the  com- 
pany is  to  be  of  such  a  large  capitalization  that  a 
more  favorable  state  in  regard  to  incorporation  fees 
must  be  sought;  for  these,  and  other  reasons,  it 
may,  in  any  particular  case,  appear  upon  full  consid- 
eration to  be  better  to  incorporate  in  some  particular 
state  whose  corporation  laws  are  more  favorable. 

The  corporation  laws  of  some  states  are  much 
more  liberal  than  those  of  others.  Some  states  have 
been  notorious  in  this  respect.  But  in  all  the  states 
parties  can  secure  incorporation  to  carry  on  legiti- 
mate lines  of  trade  and  commerce  and  where  the 
real  capitalization  approximately  corresponds  to  the 
nominal  capitalization,  it  is  not  necessary  to  go  to 
foreign  states. 


48  COBPOBATIONS. 

See.  17.  ADOPTION  OF  NAME.  Except  for  the 
provisions  of  certain  states  concerning  the  name,  a 
corporation  may  adopt  practically  any  name  to  which 
some  other  corporation,  partnership  or  individual  has 
no  right,  and  this  name  by  usage  may  acquire  great 
value  and  will  be  protected  by  the  courts. 

In  the  formation  of  a  corporation  the  choice  of 
a  name  which  shall  distinguish  it  becomes  necessary. 
If  the  business  is  already  a  going  business  and  has 
a  good  will,  it  is  usually  desirable  to  continue  under 
the  same,  or  a  similar,  name.  If  the  company  is 
newly  organized,  then  the  matter  of  selecting  a  name 
often  becomes  one  of  considerable  perplexity.  The 
particular  circumstances  must,  of  course,  govern  the 
choice. 

The  name  may  be  practically  any  name  the  incor- 
porators  determine  upon.  Thus  it  may  be  the  name 
of  a  person,  as  "Marshall  Field  &  Company"  or  it 
may  be  purely  arbitrary,  as  "The  Fair"  or  "Standard 
Oil  Company,"  etc.  In  some  states  there  are  special 
statutes  that  have  to  be  considered,  as  for  instance 
in  Ohio,  a  law  that  all  corporate  names  shall  begin 
with  "The"  and  end  with  "Company." 

A  name  should  not  be  adopted  which  is  similar 
to  that  of  an  existing  concern.  If  one  adopts  a  name 
in  order  to  attract  to  himself  the  trade  that  ought 
to  go  to  another  who  has  a  similar  name,  an  injunc- 
tion will  issue  against  using  such  name,  for  it  is  a 
species  of  unfair  competition.  A  name  becomes  by 
use  a  valuable  asset  and  the  courts  will  prevent  tres- 
passes upon  it. 

See.  18.  PROCEDURE  NECESSARY  TO  OBTAIN 
CHARTER.  The  general  corporation  laws  of  the  vari- 
ous states  set  out  In  detail  the  steps  to  bo  taken  to 


AMERICAN  COMMEBGIAL  LAW.  47 

bring  a  corporation  Into  being.  These  consist  In  filing 
and  recording  various  certificates  containing  statements 
of  fact  respecting  the  object  of  the  incorporation,  Its 
name,  capitalization,  etc.,  and  in  paying  the  prescribed 
organization  tax. 

We  have  already  seen  that  the  states  now  have 
upon  their  statute  books,  general  corporation  laws 
under  which  incorporation  must  be  brought  about. 
Incorporation,  then,  becomes  a  matter  of  compliance 
with  these  laws.  Any  persons  complying  with  these 
laws  are  entitled  to  do  business  as  a  corporation  and 
their  charter  cannot  be  arbitrarily  withheld  from 
them. 

The  provisions  of  some  of  the  states  in  this  respect 
are  more  onerous  than  those  of  others.  They  all 
differ  in  some  respect.  But  in  a  general  way,  the 
procedure  is  similar.  It  does  not  consist  in  the  ap- 
plication to  the  legislature  as  formerly,  but  in  doing 
certain  things  required  by  law,  in  stating  to  the 
proper  officers,  as  for  instance  the  secretary  of  the 
state,  that  those  things  have  been  done  and  in  filing 
and  recording  in  the  proper  places  all  the  necessary 
papers. 

As  an  illustration,  the  procedure  under  the  gen- 
eral corporation  law  of  Illinois  is  as  follows:  First, 
a  statement  is  filed  with  the  secretary  of  state,  sjgned 
by  not  less  than  three,  nor  more  than  seven  commis- 
sioners, stating  the  name,  capitalization,  location  of 
principal  office,  objects  and  duration  of  life,  of  the 
corporation  proposed.  The  secretary  of  state  issues 
a  license  empowering  the  commissioners  to  open 
subscription  books.  The  commissioners  must  then 
secure  subscriptions  to  all  of  the  capital  stock,  one- 
half  of  which  must  be  paid  in,  in  money  or  money's 


48  CORPORATIONS. 

worth.  The  commissioners  then  convene  a  meeting 
of  all  the  subscribers,  directors  are  elected,  and  other 
constituent  business  performed.  The  commissioners 
then  make  a  report  to  the  secretary  of  state,  and  he 
thereupon  issues  a  Certificate  of  Complete  Organiza- 
tion, containing  a  copy  of  all  prior  papers.  This  is 
filed  in  the  office  of  the  recorder  of  the  county  where 
the  principal  office  is  located,  and  the  incorporation 
is  then  complete. 

As  another  illustration,  the  laws  of  the  State  of 
New  York  provide  that  three  or  more  persons  may 
form  a  corporation.  They  shall  make  a  certificate 
setting  forth  the  name,  the  purposes,  the  capitali- 
zation, the  location  of  the  principal  office,  the  dura- 
tion of  life,  the  number  of  directors,  etc.,  which  cer- 
tificate shall  be  filed  with  the  secretary  of  the  state, 
and  a  duplicate  or  certified  copy  thereof  with  the 
recorder  of  the  county  where  the  principal  office  is 
located. 

These  examples  are  given  here  simply  to  indi- 
cate the  general  form  of  procedure.  The  statutes  of 
each  state  must  be  consulted  for  variations.  Strict 
compliance  with  these  laws  is  necessary  to  give  cor- 
porate life,  and  if  business  is  carried  on  without  such 
compliance,  a  personal  liability  for  all  acts  done  is 
entailed,  for  there  Is  no  corporation  to  which  such 
liability  may  attach. 

B.     In   Respect  to   Internal  Organization. 

Sec.  19.  FIRST  MEETINGS  AND  ELECTIONS  OF 
DIRECTORS  AND  OFFICERS.  The  proper  organization 
of  a  corporation  Involves  one  or  several  meetings  of 


AMERICAN  COMMERCIAL  LAW.  49 

the  subscribers  to  the  stock  and  of  the  directors  elected 
by  them.  It  also  Involves  the  election  of  the  officers 
of  the  corporation  for  definite  terms. 

Where  a  corporation  is  formed,  there  are  a  num- 
ber of  meetings  to  be  held  at  which  the  organization 
is  effected.  In  some  states  certain  of  these  meetings 
must  be  held  before  incorporation  is  legally  com- 
plete, but  elsewhere  they  may  all  follow.  The  first 
meeting  to  be  held  usually  is  that  of  the  subscribers 
to  the  stock.  At  this  meeting  the  first  board  of 
directors  is  usually  elected,  and  also  by-laws  may  be 
adopted  or  a  committee  appointed  to  draw  them 
up,  unless  the  power  of  making  by-laws  is  in  the 
directors  (as  in  some  states).  Other  business  natur- 
ally comes  up  to  be  disposed  of,  as,  perhaps,  in  what 
medium  or  property  the  subscriptions  or  some  part 
of  them  may  be  paid  although  the  directors  should 
finally  dispose  of  this  matter. 

After  the  directors  are  elected,  they  meet  to  elect 
officers  and  perform  other  business.  They  also  con- 
sider propositions  to  exchange  property  or  services 
for.  stock  and  vote  upon  it.  It  is  better  that  stock- 
holders and  directors  both  vote  upon  such  a  proposi- 
tion. 

The  minutes  of  the  first  meetings  should  be  care- 
fully made  and  in  the  minutes  of  the  directors,  at 
least,  such  propositions  as  those  to  exchange  prop- 
erty for  stock  should  be  incorporated.  Forms  of 
minutes  for  meetings  are  set  out  in  the  appendix. 

The  required  notices  for  these  meetings  must  be 
given  unless  waived.  The  law  customarily  provides 


50  CoRrOBATIONg, 

a  certain  notice  to  be  given,  but  it  can  be  waived  by 
those  entitled  to  it.7 

Sec.  20.  THE  BY-LAWS.  Incidental  to  the  organ- 
ization of  corporations  Is  the  enactment  of  by-laws, 
which  are  rules  passed  for  the  Internal  government  of 
the  corporation,  alterable  at  the  pleasure  of  the  corpo- 
ration and  binding  upon  the  stockholders  so  long  as 
regularly  enacted  and  so  long  as  they  are  not  contrary 
to  the  law  or  the  charter  of  the  corporation  or  in  con- 
travention of  common  right  or  public  policy. 

The  enactment  of  by-laws  while  usual  and  neces- 
sary to  the  proper  management  of  corporations,  is 
not,  like  the  securing  of  a  charter,  essential  to  cor- 
porate existence.  The  by-laws  are  the  general  rules 
or  regulations  enacted  by  the  pleasure  of  the  cor- 
poration. They  are  binding  on  the  stockholders  and 
upon  the  directors,  and  other  officers,  so  long  as  they 
are  not  opposed  to  the  company's  charter,  or  the  law, 
or  public  policy  of  the  state. 

It  has  been  said  that  the  by-laws  are  to  the  mem- 
bers of  a  corporation  what  acts  of  the  legislature 
are  to  the  citizens  of  a  state  while  a  charter  is  like 
the  constitution. 

A  by-law  differs  from  a  resolution  in  that  the 
latter  is  passed  not  as  a  general  rule  of  conduct, 
but  to  provide  for  some  special  case  or  emergency. 
A  resolution  usually  concerns  some  temporary  or 
unusual  matter,  while  the  by-laws  provide  rules  of 
conduct  and  general  provisions  of  a  permanent 

7.  J.  W.  Butler  Paper  Co.  v.  Cleveland,  220  111.  128  (the 
10  days'  notice  of  the  meeting  of  subscribers  to  be  given  them 
can  be  waived  by  them). 


AMEEICAN  COMMERCIAL  LAW.  51 

nature.  Thus,  if  it  should  be  desired  to  empower  the 
president  to  purchase  a  certain  piece  of  real  estate, 
the  usual  form  of  authorization  would  be  by  a  reso- 
lution regularly  passed  at  some  meeting  of  the  board 
of  directors  and  recorded  in  the  minutes  thereof. 
A  by-law  may,  however  (though  this  is  not  usually 
the  case),  be  put  in  the  form  of  a  resolution. 

By-laws  must  be  reasonable  and  fair;  they  must 
operate  equally.  They  cannot  deprive  the  stock- 
holders of  their  fundamental  rights  except  by  unan- 
imous consent. 

The  by-laws  should  concern  such  subjects  as 
these:  the  qualifications  and  duties  of  directors  and 
other  officers;  the  terms  of  office;  the  bonds  of 
officers;  the  dates  of  regular  meetings;  how  special 
meetings  may  be  called;  and  so  on.  Reference  to 
the  form  of  by-laws  set  out  in  the  appendix  will 
suggest  the  usual  provisions  of  by-laws.  By-laws 
should  be  full  rather  than  scant.  And  yet  this  de- 
pends to  a  degree  upon  the  circumstances  of  the  par- 
ticular corporation:  whether  it  is  large  or  small; 
whether  there  are  many  or  few  stockholders ;  wheth- 
er the  stockholders  are  the  officers,  etc. 

By-laws  are  more  readily  alterable  than  charters. 
A  vote  at  a  meeting  regularly  called  or  where  all 
interested  are  present,  is  sufficient.  If  all  concerned 
are  present  by-laws  may  be  suspended  temporarily; 
and  as  to  mere  matters  of  form  could  be  suspended 
at  any  meeting.  But  a  charter  cannot  be  amended 
except  by  application  to  the  state,  the  compliance 
with  the  technical  requirements,  the  payment  of  the 
fee,  etc. 

By-laws  should  be  strictly  observed  by  those  gov- 
erned by  them.  Any  violation  may  lead  to  personal 


52  COBPORATIONS. 

liability.  So  far,  however,  as  third  persons  are  con- 
cerned, a  corporation  may  by  its  conduct  waive  the 
by-laws.  Where  one  is  dealing  with  an  officer  or 
agent  of  the  corporation  in  the  general  conduct  of 
its  business  he  is  not  concerned  with  the  provisions 
of  the  by-laws.  He  can  depend  upon  the  seeming 
authority  of  such  agent,  that  is  to  say,  the  authority 
with  which  the  corporation  seems  to  have  clothed 
him. 

Stockholders  are  bound  to  know  the  by-laws,  and 
they  are  subject  to  them,  so  long  as  they  are  rea- 
sonable. 

Sec.  21.  OPENING  OF  CORPORATE  BOOKS  AND 
RECORDS.  Upon  the  organization  of  a  corporation 
the  usual  books  of  account  necessary  to  good  book- 
keeping should  be  secured;  the  accounts  of  the  corpo- 
ration should  be  carefully  and  separately  kept;  and 
there  should  be  also  opened  the  books  in  which  the 
acts  of  the  corporation,  as  such,  are  to  be  recorded,  as 
minute  books,  transfer  books,  stock  books,  etc. 

(i)  IN  GENERAL.  We  may  divide  the  books 
which  a  corporation  should  keep  into  two  general 
classes,  first,  the  books  which  are  regularly  kept  in 
any  business,  whether  incorporated  or  unincorpo- 
rated, in  which  the  bookkeeping  is  properly  done, 
such  as  cash  books,  journals  and  ledgers ;  and  second, 
the  books  which  the  corporation  must  have  because 
it  is  a  corporation,  as  stock  ledgers,  transfer  books, 
minute  books,  etc. 

Of  the  first  set  of  books  it  should  be  said  that  the 
corporation  should  be  prepared  to  keep  full  and  cor- 
rect accounts  of  all  its  business,  and  that  these 
accounts  should  be  kept  as  the  accounts  of  the  com- 


AMERICAN  COMMEBCIAL  LAW.  53 

pany.  This  advice  may  seem  superfluous  to  some, 
inasmuch  as  every  business,  if  properly  conducted, 
whether  it  be  incorporated  or  unincorporated,  should 
have  its  books,  yet  how  often  it  is  that  the  parties 
conducting  a  business,  keep  the  accounts  thereof  in  a 
more  or  less  irregular  way;  and  such  accounts  often 
have  very  little  or  indeed  no  distinction  from  the 
personal  accounts  of  those  who  take  the  profits  of 
the  business.  This  is  of  course  fundamentally  wrong 
in  the  management  of  any  business,  but  in  the  man- 
agement of  a  corporation  it  is  wrong  in  a  double 
sense.  For  not  only  is  the  corporation  a  thing  apart 
from  its  owners  from  the  standpoint  of  good  book- 
keeping, but  also  it  is  distinct  in  a  legal  sense,  and 
the  confusion  of  the  business  of  the  corporation  with 
the  business  of  its  stockholders  or  officers  or  agents, 
may  lead  to  unfortunate  consequences.  Even  if  one 
owns  all  or  practically  all  the  stock  of  the  corpora- 
tion, he  should  be  just  as  careful  as  ever  to  keep 
its  business  and  his  own  entirely  distinct.  It  should 
appear  what  the  expenses  of  the  company  are  and 
what  its  disbursements  are.  If  the  stockholders  are 
to  draw  out  the  profits  of  the  business  they  should 
do  so  regularly  by  way  of  salary  or  of  dividends. 
These  remarks  are  prompted  by  the  fact  that  many 
businesses  are  loosely  conducted  in  this  respect.  The 
incorporation  of  a  company  should  lead  to  a  careful 
system  of  bookkeeping. 

Besides  these  books  of  account  adapted  to  keep- 
ing straight  the  accounts  of  the  company,  there 
should  be  all  books  necessary  to  record  the  actions 
of  the  corporation  as  such,  but  how  extensive  these 
should  be  depends  considerably  on  the  size  and  cir- 
cumstances of  the  corporation. 


54  COBPOBATIONS. 

The  usual  books  of  record  are  as  follows: 

(2)  THE  MINUTE  BOOK.     In   this   the  minutes 
of  the  stockholders  and  of  the  directors  should  be 
kept.    The  by-laws  are  also  usually  enrolled  therein, 
and  sometimes  the  Certificate  of  Incorporation  is  at- 
tached to  one  of  the  front  pages.     What  the  min- 
utes should  contain  and  other  particulars  are  stated 
elsewhere.     In  large  corporations  there  may  be  sep- 
arate minute  books  for  stockholders  and  directors 
meetings. 

(3)  THE  STOCK  CERTIFICATE  BOOK.     This  con- 
sists of  a  number  of  blank  stock  certificates  in  the 
form  authorized  by  the  directors,  numbered  consec- 
utively and  attached  to  "stubs"  which  contain  cor- 
responding serial   numbers.     These  certificates   are 
detached   from  the  stubs  as  required  and  filled  in 
with  the  name  of  the  stockholder  and  the  number 
of  shares  which  it  represents.     The  stub  contains 
a  record  of  the  transaction.    See,  further,  the  chap- 
ter on  Transfer  of  Stock. 

(4)  THE  STOCK    LEDGER.     No    separate    stock 
ledger  is  kept  in  some  of  the  smaller  corporations 
and  in  some  it  is  contained  in  the  back  of  the  min- 
ute book.     In  fact  books  specially  prepared  for  such 
combined  purpose  are  purchasable  from  the  station- 
ers.   But  it  is  usually  better  to  have  a  separate  stock 
ledger  and  in  some  states  laws  require  a  stock  ledger 
to  be  kept,  available  at  all  times  for  inspection  by 
the  stockholders   upon  demand.     The  stock  ledger 
shows  at  a  glance  the  history  of  the  stockholder's 
relationship  to  the  company  and  his  present  stand- 
ing, so  far  as  he  has  put  the  same  of  record  with 
the  officers  of  the  company.    It  contains  the  name  of 
each  recorded  stockholder,  alphabetically  arranged, 


AMERICAN  COMMEBCIAL  LAW.  55 

his  address,  the  number  of  shares  owned  by  him,  the 
date  and  source  of  acquisition,  the  date  of  the  dis- 
position of  any  shares  and  to  whom  disposed,  and 
how  much  stock  remains  to  his  credit.  Statutory 
provisions  may  require  other  details. 

(5)  THE  TRANSFER  BOOK.     This  consists  in  a 
series  of  blank  transfer  forms  to  be  filled  out  and 
signed  by  the  transferor  or  his  agent.    When  stock 
is  transferred,  it  is  usual  to  fill  out  a  power  of  at- 
torney on  the  back  of  the  certificate  appointing  the 
transferee  or  some  other  person  the  agent  of  the 
transferor  to  make  the  transfer  on  this  book. 

(6)  CORPORATE  CALENDAR.  The  secretary  should 
make  a  corporate  calendar  which  should  cover  the 
entire  year  and  should  indicate  to  him  the  days  on 
which  notices  are  to  be  sent,  meetings  are  to  be  held, 
taxes  are  payable,  reports  to  state  officers  are  due, 
and  all  other  matters  which  he  must  attend  to  on 
certain  days. 

(7)  OTHER  BOOKS.   Besides  the  books  mentioned, 
other  books  may  be  desirable,  especially  in  the  larger 
corporations,  as   for   instance,  a  subscription  book 
(but  in  smaller  corporations  subscriptions  could  be 
pasted  in  the  minute  book  or  stock  ledger)  ;  dividend 
books   (supplied  in  many  cases  by  a  voucher  sys- 
tem) ;  a  bond  register,  etc. 


CHAPTER  4. 


THE  PROMOTER. 

Sec.  22.  PROMOTER  DEFINED.  A  promoter  la  one 
who  undertakes  to  organize  and  secure  the  Incorpora- 
tion of  a  company,  securing  the  necessary  subscribers 
and  funds,  and  obtaining  or  taking  steps  to  obtain  the 
charter. 

A  promoter  is  one  who  organizes  an  enterprise 
and  secures  its  incorporation.  It  is  not  necessary 
in  every  case  that  there  be  a  promoter,  in  the  sense 
that  that  word  is  commonly  used.  Companies  are 
incorporated  in  great  numbers  without  the  assist- 
ance of  any  one  who  could  properly  be  termed  a 
promoter.  But  where  an  enterprise  is  new  and 
where  some  idea  is  to  be  exploited,  and  subscribers 
are  to  be  secured  in  large  numbers,  there  is  usually 
a  person  or  a  number  of  persons  who  are  fitly  de- 
scribed as  promoters.  They  undertake  to  build  the 
corporation  and  launch  it  upon  the  sea  of  business. 
They  secure  the  necessary  subscribers,  often  they 
secure  valuable  patent  rights,  options  upon  land,  etc., 
and  take  the  necessary  steps  to  secure  the  charter. 

Sec.  23.  LIABILITY  OF  THE  CORPORATION  FOR 
ACTS  OF  THE  PROMOTER.  The  corporation  is  not 
liable  upon  the  contracts  made  by  promoters  prior  to 
Incorporation,  except  where  after  Incorporation  the 

(56) 


AMERICAN  COMMERCIAL  LAW.  57 

corporation  steps  Into  the  promoter's  place  and  adopts 
his  contracts.  Such  promoter  Is  personally  liable  on 
his  contracts  made  prior  to  incorporation. 

For  the  acts  of  the  promoter  which  he  does  prior 
to  incorporation,  the  promoter  is  personally  liable, 
and  the  corporation  upon  coming  into  existence  does 
not  become  liable  unless  it  can  be  said  that  it  adopts 
the  acts  of  the  promoter.  Thus  a  promoter  might 
go  to  considerable  expense  in  securing  the  charter 
and  yet  the  corporation  be  in  no  sense  liable  for 
his  acts.  He  cannot  represent  it  as  an  agent,  for  it 
has  as  yet  no  existence. 

After  the  corporation  comes  into  being  it  may 
take  the  benefits  of  what  a  promoter  has  done,  in 
such  a  direct  and  substantial  way,  that  it  ought 
to  be  held  upon  the  contracts  made  in  respect  to 
such  benefits.  In  such  case  the  law  will  hold  the 
corporation  liable  by  adoption.  Thus,  where  it 
comes  into  possession  of  property  contracted  for  by 
the  promoter,  knowing  the  circumstances,  it  could 
be  held,  as  though  the  promoter  in  making  such 
contract  had  been  its  agent. 

Sec.  24.  THE  PROMOTER  IN  A  POSITION  OF 
TRUST.  A  promoter  is  In  a  position  of  trust  towaro 
subscribers  and  the  corporation.  He  must  exercise  the 
utmost  good  faith,  making  full  disclosures  and  taking  no 
secret  profits. 

A  promoter  stands  in  a  position  of  confidence. 
It  is  true  that  there  are  many  instances  in  which 
promoters  have  greatly  abused  their  positions  and 
have  exercised  anything  but  good  faith.  Yet  the  law 
is  strict  that  a  promoter  is  in  a  position  of  trust 


58  COBPOBATIONS. 

and  must  make  full  disclosure  of  all  material  facts 
where  he  deals  with  the  subscribers  or  the  cor- 
poration and  is  not  entitled  to  secret  profits.  Thus 
a  promoter  cannot  sell  to  a  corporation  at  an  advance 
in  price  property  which  he  has  secretly  purchased 
and  which  he  pretends  to  be  selling  as  agent  for  an- 
other. Or  if  he  acts  as  apparent  owner  he  cannot 
misrepresent  the  true  cost  to  him.  The  promoter  can 
make  a  profit  if  all  consent  as  where  the  transaction 
is  open  and  full  disclosure  of  the  facts  has  been 
made. 

The  promoters  legitimate  profits  are  often  very 
large.  His  services  are  very  valuable  and  he  creates 
a  means  of  wealth  for  those  who  employ  him  or 
become  his  co-adventurers.  To  these  profits  which 
are  to  come  to  him  as  promoter  and  which  he  con- 
tracts for  he  is  entitled.  Such  profits  often  come  to 
him  in  the  shape  of  a  portion  of  the  stock. 


PART  H. 

STOCK  AND  STOCKHOLDERS. 

CHAPTER  5. 

DEFINITIONS  AND  KINDS  OF  STOCK. 

Sec.  25.  DEFINITION  OF  CAPITAL  STOCK  AND 
SHARE  OF  STOCK.  The  capital  stock  of  a  corporation 
is  the  amount  of  capital  which  it  is  authorized  by  law 
to  receive  from  subscribers  with  which  to  do  business. 
A  share  of  stock  is  the  unit  of  interest  held  by  the 
stockholders,  the  number  of  which,  held  by  any  stock- 
holder, determines  the  amount  of  his  liability  to  con- 
tribute to  said  capital  stock. 

Every  stock  corporation  has  a  certain  capital- 
ization provided  for  in  its  charter  and  the  capital 
stock  may  be  defined  as  that  fund  contributed,  or 
to  be  contributed,  by  subscribers  that  the  corporation 
may  pursue  its  objects.  How  much  each  subscriber 
shall  contribute  is  determined  by  the  number  of 
shares  he  holds. 

The  amount  of  capital  stock  of  a  corporation  is 
always  determined  by  its  charter.  But  that  amount 
may  be  increased  or  diminished  by  amending  the 
charter  in  that  respect  upon  compliance  with  the 
law  of  the  state  in  which  incorporation  was  had. 
In  no  other  way  may  the  capitalization  be  increased 
or  decreased.  Where  the  amount  is  increased,  we 

(59) 


60  COBPOBATIONS. 

have  seen  that  the  present  stockholders  may,  if  they 
choose,  subscribe  pro  rata  for  the  new  shares. 

Sec.  26.  COMMON  AND  PREFERRED  STOCK.  The 
stock  of  a  corporation  may  be  divided  into  common  and 
preferred  stock;  though  in  the  majority  of  corporations, 
especially  the  smaller  ones,  all  stock  is  of  one  sort,  that 
Is,  common.  Preferred  stock  is  that  stock  which  enti- 
tles the  holders  to  share  in  the  net  earnings  of  the 
company  up  to  a  named  per  cent  In  priority  to  the  com- 
mon stockholders. 

Many  corporations — most  of  the  smaller  ones — 
have  only  one  quality  of  stock,  but  in  other  corpora- 
tions there  are  two  sorts  of  stock,  one  of  which  is 
preferred  before  the  other  up  to  a  certain  per  cent 
in  the  matter  of  dividends,  and  perhaps  also  in  the 
matter  of  distribution  of  assets  upon  dissolution. 

Stock  which  is  preferred  as  to  dividends  is  either 
cumulative  or  non-cumulative.  If  it  is  non-cumu- 
lative the  dividends  to  be  paid  in  any  fiscal  year  are 
governed  by  the  earnings  of  that  year  alone.  If 
cumulative,  the  dividends  unearned  and  unpaid 
during  any  year  are  payable  from  the  earnings  of 
subsequent  years.  The  particular  language  used  in 
each  case  must  be  carefully  considered.  If,  however, 
there  is  no  express  provision  in  that  regard,  it  will 
be  presumed  that  the  stock  is  cumulative. 

In  any  carefully  organized  corporation  the  exact 
extent  and  nature  of  the  preference  would  of  course 
be  indicated  with  particularity. 

The  earnings  are  to  pay  the  dividends  of  the  pre- 
ferred stock  up  to  a  certain  per  cent,  as,  for  instance, 
six  per  cent.  Above  that  amount  the  common  stock- 
holders are  entitled  either  to  the  whole  of  the  fund 


AMERICAN  COMMERCIAL  LAW.  61 

set  aside  for  payment  of  dividends,  or,  in  some  cases, 
to  share  such  fund  in  common  with  the  preferred 
shareholders.  It  sometimes  happens  that  the  earn- 
ings of  a  corporation  are  so  large  that  the  common 
stock  pays  at  times  a  larger  dividend  than  the  pre- 
ferred stock  and  has  a  higher  market  value. 

Preferred  stock  is  issued  for  the  purpose  of  secur- 
ing subscriptions  not  otherwise  obtainable,  as  it  gives 
one  a  more  certain  return  upon  his  money.  At  the 
same  time,  a  preferred  shareholder  is  only  a.  share- 
holder and  if  the  corporation  becomes  insolvent  he 
can  not  compete  with  creditors.  The  stockholders 
have  no  right  in  the  division  of  the  assets  until  the 
creditors  are  paid,  and  this  is  as  true  of  preferred 
as  it  is  of  common  stockholders.  If  a  corporation 
pays  its  debts,  and  upon  dissolution  the  stockholders 
are  entitled  to  the  assets,  the  shareholders  who  are 
preferred  as  to  assets  as  well  as  dividends  are  first 
to  be  satisfied. 

In  another  sense,  also,  preferred  stockholders 
are  not  creditors  of  the  corporation.  They  cannot 
sue  the  corporation  for  the  dividend  until  it  has 
been  declared  by  the  directors  and  the  directors  have 
a  certain  discretion  in  that  respect  even  though  there 
may  be  net  earnings  available  for  that  purpose,  yet 
if  the  directors  abuse  their  discretion,  the  preferred 
stockholders  can  compel  a  declaration  of  dividends 
in  a  suit  brought  for  that  purpose. 

Preferred  stock  is  sometimes  called  "guaranteed 
stock." 

Preferences  in  stock  cannot  be  created  after  the 
common  stock  has  been  subscribed  for  without  the 
consent  of  all  the  stockholders,  for  this  would  result 
in  an  unwarrantable  cheapening  of  the  common 
stock. 


62  COBPOBATIONS. 


Sec.  27.  UNISSUED  AND  TREASURY  STOCK.  Un- 
issued stock  Is  that  stock  which  has  never  belonged 
to  any  stockholder.  Treasury  stock  is  that  stock  which, 
having  been  once  issued,  has  been  reacquired  by  the 
corporation. 

All  the  stock  of  the  corporation  may  not  have 
been  subscribed  for  at  its  organization,  for  in  many 
states  this  is  not  required.  Stock  unissued  is  called 
"unissued  stock."  Issued  stock  reacquired  by  the 
corporation  is  called  "treasury  stock." 

Sec.  28.  THE  CERTIFICATE  OF  STOCK.  The 
stock  certificate  is  a  written  acknowledgment  by  the 
corporation  that  the  person  therein  named  is  the  holder 
of  so  many  shares  of  stock. 

The  certificate  is  the  written  evidence  of  the  own- 
ership of  the  stock.  It  usually  is  made  to  a  particu- 
lar person.  Such  certificate  is  not  essential  to  mem- 
bership in  a  corporation,  but  it  is  highly  convenient 
for  purposes  of  protection  and  transfer.  A  stock- 
holder is  entitled  to  such  certificate  and  may  compel 
its  issuance.  In  fact,  in  order  to  facilitate  transfer 
he  may  ask  that  his  stock  be  divided  into  any  number 
of  certificates,  so  long  as  he  is  reasonable  about  it. 

The  secretary,  or  the  transfer  clerk,  if  there  be 
one,  issues  the  certificate.  It  is  usually  signed  by  the 
president,  and  is  under  the  corporate  seal  with  the 
attestation  of  the  secretary. 

The  transfer  of  stock,  the  right  to  compel  divi- 
dends, the  liabilities  of  stockholders,  and  other  mat- 
ters concerning  stockholders  are  discussed  in  the 
following  chapters. 


CHAPTER  «. 


SUBSCRIPTION  TO  STOCK. 

8eo.  29.  FORM,  MANNER  AND  EFFECT  OF  SUB- 
SCRIBING TO  STOCK.  A  stock  subscription  need  not 
be  in  any  special  form,  but  should,  as  a  matter  of  fact, 
be  made  upon  the  books  of  the  company  or  some  care- 
fully drawn  subscription  contract  that  may  be  kept  in 
the  corporate  records.  An  accepted  subscription  con- 
stitutes a  contract  between  the  subscriber  and  the  cor- 
poration. 

One  becomes  a  stockholder  of  a  corporation  either 
through  subscription  to  its  stock  or  by  purchasing 
outstanding  stock — that  is,  stock  which  some  one 
else  originally  subscribed  for  and  which  was  issued 
to  him.  In  this  chapter  we  are  simply  to  note  how 
subscriptions  are  made,  and  to  consider  that,  when 
accepted,  they  constitute  a  contract  between  the 
subscriber  and  the  corporation. 

A  subscriber  to  stock  may  be  in  one  of  these 
possible  situations: 

First:  In  respect  to  whether  he  is  offeror  or  of- 
feree. That  is,  the  corporation  may  propose  to  take 
him  as  subscriber,  or  he  by  his  subscription  may  pro- 
pose to  buy  stock.  In  either  case  a  contract  results 
upon  acceptance  by  the  offeree,  and  little  importance 
rests  in  the  distinction  except  in  the  perhaps  rare 
cases  where  either  the  corporation  or  the  subscriber 
desires  to  withdraw  and  claims  that  right  just  as  any 

(63) 


64  COBPOBATIONS. 

offeror  in  any  contract  has  a  right  to  withdraw  un- 
less and  until  his  offer  has  been  accepted.  In  that 
case  it  might  be  material  who  was  offeror  or  of- 
feree, Acceptance  in  the  case  of  the  corporation 
may  be  and  indeed  usually  is,  implied  from  its  con- 
duct, for  it  is  not  necessary  that  there  be  any  express 
acceptance. 

Second :  In  respect  to  whether  the  corporation  has 
been  formed  or  is  merely  projected.  If  the  corpora- 
tion has  not  yet  been  brought  into  being,  it  cannot 
be  an  offeror.  It  becomes  an  offeree  of  previous 
subscriptions  upon  coming  into  existence  unless  the 
offers  have  before  that  time  been  withdrawn.  But 
parties  may,  before  incorporation,  make,  among 
themselves,  a  valid  contract  to  subscribe,  so  that 
withdrawal  would  amount  to  a  breach  of  contract. 

Some  state  laws  provide  that  all  the  stock  or  a 
certain  percentage  thereof  must  be  subscribed  before 
a  corporation  shall  be  entitled  to  its  charter. 

A  form  of  subscription  contract  is  set  out  in  the 
Appendix. 

Sec.  30.  FRAUD  IN  SECURING  STOCK  SUBSCRIP- 
TIONS. For  fraudulent  misrepresentations  of  fact  made 
to  a  subscriber  by  a  duly  authorized  agent  of  the  cor- 
poration, and  relied  upon  by  him,  he  may  defend  against 
payment  of  the  subscription,  or  if  payment  has  been 
made  he  may  have  rescission,  provided,  however,  he 
has  not  been  guilty  of  negligence  in  asserting  his 
defense  or  claim,  and  provided  the  corporation  has  not 
become  Insolvent. 

If  a  corporation,  having  unissued  shares,  gives 
authority  to  agents  to  sell  those  shares,  such  agents 
may,  in  their  zeal  or  cupidity,  make  statements  that 
are  false,  and  thereby  accomplish  the  sale  of  the 


AMERICAN  COMMERCIAL  LAW.  65 

shares.  One  who  subscribes  upon  such  false  rep- 
resentations may  defend  against  payment,  or  if  he 
has  paid  he  may  have  rescission  of  the  contract,  pro- 
vided he  acts  with  diligence,  and  provided  the  cor- 
poration has  not  become  insolvent.  This  does  not 
mean  that  it  is  necessary  for  the  corporation  to 
positively  authorize  the  fraud,  but  means  that  if  it 
desires  to  take  advantage  of  the  acts  of  its  agents 
in  such  cases  it  must  accept  the  responsibility 
for  the  fraudulent  representations  made  in  its 
name  and  upon  its  apparent  authority  and  behalf. 

The  fraud  which  will  enable  one  to  avoid  his 
subscription  consists  in  a  misstatement  of  fact, 
made  to  be  relied  upon  and  which  is  actually  relied 
upon  by  the  party  to  whom  it  is  made. 

It  is  a  general  principle  of  the  law  of  sales  that 
the  statement  of  a  mere  opinion  or  prediction,  no 
matter  how  highly  colored,  and  though  in  fact  made 
contrary  to  the  seller's  own  belief,  constitutes  neither 
fraud  nor  a  warranty.  Every  one  is  bound  to  take 
a  mere  opinion  or  prediction  at  its  real  value.  Every 
person  is  bound  to  know  that  opinions  and  pre- 
dictions in  sales  are  nothing  upon  which  a  person 
may  base  a  legal  right.  Sellers  will  "puff  their 
wares"  and  use  extravagant  language.  Thus  a  pre- 
diction that  stock  will  rise  in  value  is  not  a  repre- 
sentation upon  which  anyone  can  rely  in  any  definite 
way.  But  if  a  fact  is  stated,  that  is  something  about 
which  the  seller  may  know,  consequently  the  buyer 
may  rely  upon  such  statement  and  hold  the  maker 
to  its  truth.  Thus,  the  assertion  that  the  output 
has  been  so  much,  that  dividends  have  been  paid, 
that  the  corporation  owns  certain  property,  are 
all  statements  of  facts,  which,  if  made  to  induce  and 

•  B— 0 


66  CORPORATIONS. 

do  actually  induce  the  sale,  constitute  representa- 
tions for  the  untruth  of  which  a  defense  to  the 
suit  for  the  subscription  may  be  made  or  rescission 
may  be  asked  by  the  buyer. 

Statements  in  a  prospectus  issued  by  the  authority 
of  a  corporation  are  binding  upon  it  and  enter  into 
the  contracts  of  those  who  subscribe  on  the  faith  of 
such  prospectus.  While  opinions  and  predictions 
therein  stated  must  be  regarded  as  such,  yet  in  the 
statement  of  facts  the  prospectus  must  be  honest 
and  fair.  And  it  must  not  give  wrong  impressions 
by  omitting  material  facts. 

Where  a  company  is  yet  to  be  incorporated,  the 
promoters  or  commissioners  have  no  real  or  seem- 
ing authority  from  it  to  make  representations,  and 
therefore  it  has  been  held  that  the  defense  of  fraud 
cannot  be  made  in  such  cases,  but  the  subscriber  is 
left  to  his  action  for  damages  against  such  promoters 
or  commissioners. 

Where  one  has  a  right  to  withdraw  on  account 
of  fraud,  he  must  act  diligently.  Unexplained  de- 
lay for  more  than  a  reasonable  time  will  amount  to 
a  ratification  and  bar  him  of  his  defense. 

Usually  it  is  also  held  that  the  insolvency  of  the 
corporation  prevents  an  assertion  of  fraud,  because 
the  apparent  assets  of  the  corporation  would  be 
thereby  depleted  to  the  injury  of  creditors. 

This  subject  of  fraud  and  misrepresentation  by 
the  corporation  through  its  agents  must  not  be  con- 
fused with  that  of  a  sale  of  outstanding  shares  by 
the  owners  thereof.  Whatever  fraudulent  or  other 
assertions  are  made  in  such  cases  are  of  course  not 
made  in  behalf  of  the  corporation,  for  such  owners 
are  not  acting  as  agents  of  the  corporation,  but  as 
their  own  principals. 


AMERICAN  COMMERCIAL  LAW.  67 

Sec.  31.    SUBSCRIPTIONS  UPON  CONDITION.    A 

subscription  made  upon  some  condition  cannot  be  en- 
forced unless  the  condition  Is  performed,  provided  the 
condition  is  not  secret  and  therefore  a  fraud  on  other 
subscribers  and  on  creditors,  and,  provided,  It  Is  not 
objectionable  as  an  oral  variation  of  a  written  con- 
tract. 

By  a  contract  properly  drawn  subscribers  could 
succeed  in  imposing  a  condition  to  be  performed  by 
the  corporation  before  their  liability  is  to  attach,  but 
more  frequently  it  seems  that  where  a  defense  is  made 
that  a  condition  has  not  been  performed,  the  con- 
tract of  subscription  is  a  seemingly  absolute  one, 
and  the  condition  is  secret  and  perhaps  oral.  Now 
the  capital  stock  of  a  corporation  is  a  fund  paid  in 
or  to  be  paid  in  by  its  subscribers  and  stockholders 
that  it  may  conduct  its  business  and  pay  its  liabil- 
ities. Whenever,  therefore,  a  subscriber  imposes 
some  secret  condition  that  he  shall  not  be  compelled 
to  pay  his  apparent  obligation  unless  some  land  of 
his  is  purchased,  or  some  work  is  done  to  his  ad- 
vantage, or  some  property  of  the  corporation  is  lo- 
cated near  his  property,  or  some  other  undertaking 
of  some  sort  is  accomplished,  he  is  imposing  a  con- 
dition, which,  if  enforced,  may  go  to  deplete  the 
fund  to  which  creditors  have  a  right  to  look  for  the 
payment  of  their  debts.  It  is  accordingly  held  that 
such  secret  conditions  are  void  and  the  subscription 
may  be  enforced  as  an  absolute  one.  Futhermore, 
it  is  a  well  known  rule  of  law  that  where  one  makes 
a  written  contract  he  cannot  alter  the  terms  thereof 
by  setting  forth  a  collateral  oral  agreement  which 
he  claims  was  to  stand  in  the  stead  of  the  written 
one.  The  writing  must  govern. 


CHAPTER  7. 


PAYMENT  FOR  STOCK. 

Sec.  32.  LIABILITY  UPON  UNQUALIFIED  SUB- 
SCRIPTION. The  liability  of  a  subscriber  to  stock  Is 
to  pay  the  corporation  the  par  value  thereof,  unless 
otherwise  agreed;  and  no  more  can  be  called  for  or 
assessed,  unless  otherwise  agreed. 

When  one  subscribes  to  the  stock  of  a  corporation 
either  before  or  after  the  charter  is  secured,  his 
liability,  upon  the  acceptance  of  his  subscription,  is 
lo  pay  the  par  value  of  the  stock  subscribed  for, 
and  no  more  or  less  unless  it  has  otherwise  been 
agreed.  When  he  has  paid  that  amount,  no  further 
calls  can  be  made  upon  him  and  he  is  liable  to  no 
further  assessments.7*  We  have  already  considered 
that  one  purpose  of  incorporation,  very  often  the 
chief  or  perhaps  the  only  one,  is  to  limit  one's  lia- 
bility to  a  definite  amount — the  par  value  of  the 
shares  taken. 

But  a  contrary  agreement  may  be  made.  Stock 
may  be  offered  to  a  subscriber  below  par ;  or  assess- 
ments may  be  provided  for  as  a  part  of  his  contract 
of  subscription.  In  all  such  cases  the  agreement 
really  made  would  be  binding  upon  the  corporation 
and  the  subscriber.  Whenever  other  stockholders 
would  be  thereby  defrauded  or,  as  we  shall  see, 
creditors  would  be  deprived  of  payment  of  their 
debts,  such  special  agreement  might  not  stand. 

7a.  In  California  and  one  or  two  other  states  fully  paid 
stock  may  be  further  assessed. 

(68) 


AMERICAN  COMMEBCIAL  LAW.  69 

Sec.  33.  MEDIUM  OF  PAYMENT.  Payment  of 
stock  may  be  either  In  money  or  other  property  as 
agreed  upon. 

Whether  stock  must  be  paid  in  money  or  in  other 
property  depends  upon  the  agreement  between  the 
subscriber  and  the  corporation.  There  is  no  reason 
for  holding  that  a  corporation  may  not  receive  pay- 
ment of  stock  in  any  kind  of  property.  The  cor- 
poration must  have  property  of  various  sorts,  and 
may  as  well  pay  for  it  with  certificates  of  stock 
as  in  money  which  it  receives  for  such  certificates. 
Often  the  corporation  is  organized  to  take  over  an 
existing  business  and  they  who  are  to  own  the  shares 
are  the  owners  of  the  business  to  be  taken  over  by 
it.  In  such  a  case,  the  business  is  valued  and  then 
transferred  for  that  value  to  the  corporation,  and 
shares  are  issued  to  its  owners.  To  provide  that 
payment  must  be  in  money  would  in  many  cases 
mean  that  money  must  be  paid  to  the  corporation  by 
the  person  to  whom  it  is  to  be  immediately  returned 
for  the  property  he  is  to  convey. 

Payment  for  shares  may  even  be  in  services  ren- 
dered to  the  corporation,  but  these  services  must 
be  actually  given,  and  they  must  be  given  pursuant 
to  and  in  consideration  of  the  issuance  of  the  stock. 
And  if  the  stock  is  issued  for  services,  which  are 
yet  to  be  rendered,  it  is  unpaid  stock  until  the  serv- 
ices are  actually  rendered  and  if  they  are  never 
given  the  stock  must  be  paid  for  in  some  other  way, 
or  else  it  is  unpaid. 

Sec.  34.  DEFINITION  OF  "WATERED  STOCK." 
Stock  Is  said  to  be  "watered"  when  It  is  issued  by  a 
corporation  either  under  an  agreement  with  the  sub- 


70  CORPORATIONS. 

scrlber  that  he  need  not  pay  the  whole  or  that  he  need 
not  pay  some  part  of  the  par  value  of  such  stock.  In 
other  words,  It  Is  stock  which  In  whole  or  part  does 
not  represent  real  value,  but  which  purports  to  rep- 
resent such  value. 

"Watered  stock"  is  that  stock  which  is  issued  at 
some  discount,  usually  a  heavy  one,  from  the  par 
value  or  which  indeed  is  issued  entirely  as  a  bonus 
to  the  subscribers  of  other  stock.  It  is  stock  which 
is  meant  to  pass  upon  the  market  as  "fully  paid 
and  non-assessable"  when,  as  a  matter  of  fact,  it 
has  never  been  paid  and  really  represents  no  value 
whatever  or,  at  best,  represents  only  part  of  the 
value  expressed  upon  its  face.  It  is  usually  issued 
for  the  purpose  of  enabling  those  to  whom  it  is 
issued  to  resell  it  upon  the  market  at  an  advance 
over  what  they  have  paid  for  it  in  order  to 
profit  heavily.  Frequently  it  is  issued  in  exchange 
for  property  or  services  purposely  overvalued.  We 
shall  see  in  subsequent  sections  what  rights  creditors 
have  in  respect  to  the  payment  of  such  stock,  and 
consider  some  of  the  difficulties  connected  with  this 
subject,  the  chief  one  of  which  perhaps  is  the  dif- 
ficulty of  discovering  whether  or  not  property 
received  in  full  payment  for  stock  has  been  pur- 
posely and  dishonestly  overvalued. 

Sec.  35.  RIGHTS  OF  CREDITORS  RESPECTING 
PAYMENT  OF  STOCK  SUBSCRIPTION.  Where  cred- 
itors of  a  corporation  remain  unpaid  by  it,  they  may 
demand  that  the  subscriber  pay  the  par  value  of  his 
stock  and  that  fraudulent  and  gross  overvaluations  of 
property  received  for  stock  be  ignored  or  set  aside. 

We  are  not  now  considering,  as  such,  the  rights 
of  creditors  of  the  corporation,  yet  the  question  of 


AMEKICAX  COMMEBCIAL  LAW.  71 

the  stockholder's  liability  upon  his  stock  is  so  in- 
volved with  the  rights  of  creditors  that  it  is  better 
to  consider  the  rights  of  creditors  in  that  respect 
at  this  point.  When  one  subscribes  for  stock  he 
desires  to  know  to  what  extent  he  is  liable  there- 
upon, whether  it  be  at  the  suit  of  the  corporation 
or  at  the  suit  of  the  creditors  in  some  insolvency 
proceeding. 

The  capitalization  of  the  corporation  represents 
the  amount  which  it  is  entitled  to  receive  from  sub- 
scribers with  which  to  carry  on  its  business,  and  the 
subscribers  are  those  who  have  apparently  agreed 
to  pay  in  as  much  of  this  amount  as  the  number  of 
shares  held  by  them  would  indicate.  If  a  cor- 
poration seems  to  have  a  capital  stock  of  $50,000, 
all  of  which,  or  a  certain  part  of  which,  is  subscribed, 
this  indicates  to  the  world  that  it  has  received  or  is 
entitled  to  receive  that  much  from  its  subscribers 
as  a  fund  with  which  to  carry  on  its  business  and 
pay  its  debts.  It  has  been  laid  down,  therefore, 
with  more  or  less  strictness  by  the  different  courts, 
that  when  a  corporation  becomes  insolvent,  subscrib- 
ers are  responsible  at  the  suit  of  the  corporate  credit- 
ors for  the  par  value  of  the  stock  subscribed  for  by 
them,  with  little  regard  to  any  contract  between 
subscriber  and  corporation  attempting  to  limit  the 
liability,  and  this  liability  persists  in  many  states 
even  though  one  has  sold  his  stock  to  another  until 
either  he  or  someone  else  in  the  line  of  transfer  has 
paid  the  par  value  of  that  stock  to  the  corporation. 

Starting  with  the  case  of  one  who  subscribes  to 
the  capital  stock  of  a  corporation  under  an  agree- 
ment to  pay  its  par  value,  it  may  be  said  that  not 
only  can  the  corporation  have  judgment  for  what- 


72  COBPOKATIOXS. 

ever  upon  call  remains  unpaid,  but  creditors  in  a 
proper  proceeding  may  compel  the  payment  of  so 
much  thereof  as  is  necessary  to  satisfy  their  claims; 
and  the  corporation  cannot  give  any  release  of  that 
liability  in  whole  or  part  which  will  be  good  as 
against  the  creditors  of  the  corporation.  Where 
one  has  subscribed  for  stock  at  its  par  value,  he 
should  know  that  if  the  corporation  becomes  in- 
solvent he  may  be  compelled  to  pay  the  entire  amount 
of  his  subscription  though  he  has  an  agreement 
with  the  corporation  otherwise.  It  is  no  defense 
in  such  a  case  that  other  subscribers  have  not  paid. 

If  one  does  not  agree  to  pay  the  par  value,  but 
subscribes  for  it  at  less  than  par,  such  an  agreement 
may  be  good  as  between  corporation  and  sub- 
scriber but  is  not  good  so  far  as  creditors  are  con- 
cerned ;  they  may  ignore  any  such  agreement  and 
insist  that  the  stockholder  pay  the  entire  par  value 
of  his  stock  if  that  becomes  necessary  to  satisfy 
their  claims.  In  some  states,  however,  if  the  cred- 
itor at  the  time  his  contract  is  made,  knows  that  the 
subscriber  has  such  agreement  with  the  corporation 
limiting  his  liability,  he  cannot  insist  that  the  sub- 
scriber pay  more  than  he  agreed,  on  the  ground  that 
he  could  not  have  relied  upon  such  liability  as  an 
apparent  asset  of  the  corporation;  but  in  other  states 
the  creditor's  knowledge  is  immaterial.8 

This  case  should  not  be  confused  with  the  one 
where  a  person  buys  shares  from  another  stockhold- 
er, as  where  he  purchases  a  certificate  on  the  mar- 
ket, If  that  stock  was  once  fully  paid,  it  cannot 

8.  See  case  note,  8  Lawyers'  Reports  Annotated,  N.  S. 
271;  Sprague  v.  National  Bank  of  America,  172  111.  149. 


AMERICAN  COMMEBOIAL  LAW.  73 

matter  how  little  an  assignee  pays  for  it.  And  even 
where  not  fully^paid,  the  usual  rule  is  that  a  pur- 
chaser who  does  not  know  of  the  fact,  cannot  be 
made  to  pay  for  the  stock.  This  subject  is  discussed 
elsewhere. 

Let  us  suppose  that  A.  subscribes  for  ten  shares 
in  the  M.  Corporation,  agreeing  to  pay  the  par  value 
of  $100.00  per  share,  and  ten  shares  in  the  N.  Cor- 
poration agreeing  to  pay  one-half  the  par  value  of 
$100  per  share.  Creditors  can  force  A.  in  each  case  to 
pay  $100  per  share.  Whenever  he  has  paid  that  to 
the  corporation  his  liability  is  forever  gone.  But 
otherwise  those  whose  debts  the  corporation  cannot 
pay,  can  enforce  the  subscriber's  apparent  liability 
to  pay  the  par  value.  This  apparent  liability  is  an 
asset  which  creditors  may  avail  themselves  of  and 
exists  whenever  the  corporation  has  not  at  some 
time  either  from  the  original  subscriber  or  else- 
where in  the  line  of  transmission  received  the  par 
value  of  the  particular  stock  involved. 

We  now  come  to  the  more  difficult  cases  in  which 
property  has  been  promised  or  transferred  in  ex- 
change for  stock  and  has  been  overvalued — either 
honestly  or  fraudently — by  the  parties.  In  such 
cases,  the  corporation,  by  our  hypothesis,  has  been 
authorized  in  its  charter  to  issue  stock  to  and  for 
a  certain  amount,  yet  by  means  of  overvaluation  of 
property,  has  issued  that  stock  for  a  lower  amount. 
The  question  might  well  be  asked  why  there  should 
be  any  difference  in  this  case  from  the  case  where 
cash  is  paid  or  promised  for  the  stock,  and  some 
courts  answer  that  there  should  be  none  and  that 
if  a  corporation  issues,  as  it  may,  its  stock  for  prop- 
erty, that  property  should  and  must  have  the  value 


74  CORPORATIONS. 

which  the  stock  represents.  Courts  which  adopt 
this  view  enforce  the  rule  that  stock  must  be  paid  for 
in  money  or  money's  worth.  This  is  the  "true 
value"  rule.  In  such  a  case,  the  stock  must  be  con- 
sidered unpaid  in  whole  or  part  without  much  re- 
gard to  the  good  faith  of  the  directors  or  other 
officers  of  the  corporation  in  making  the  valuation. 
This  is  the  view  of  the  Illinois  supreme  court,  which 
has  asserted  in  various  cases  that  stock  must  be 
paid  for  in  money  or  money's  worth,  that  is  if 
property  is  received  for  it,  a  valuation  which  it 
would  have  in  open  market  must  be  placed  upon 
it.9  Yet  even  where  this  rule  prevails,  it  is  not 
believed  that  the  courts  would  look  too  closely  into 
an  honest  transaction  where  substantial  value  was 
received  and  the  discrepancy  was  not  great.  Most, 
if  not  all  of  the  cases,  have  been  cases  where  the 
property  had  little,  if  any  value,  as  for  instance 
where  worthless  patent  rights,  formulae,  etc.,  have 
been  received. 

Remember  that  we  are  now  considering  these 
transactions  from  the  standpoint  of  creditors.  As 
between  the  corporation  and  the  stockholder,  such 
transactions  would  of  course  stand  as  made. 

Other  courts  adopt  what  is  known  as  the  "good 
faith  rule"  and  will  not  overturn  a  transaction  even 
for  the  benefit  of  the  creditors  where,  though  the 
property  was  overvalued,  there  was  no  bad  faith 
or  dishonest  purpose  in  doing  so,  but  the  directors 
honestly  believed  that  such  property  had  or  would 
have  substantially  that  worth  to  the  corporation. 

9.    Garden  City  Sand  Co.  v.  Crematory  Co.,  205  I1L  42. 


AMERICAN  COMMERCIAL  LAW.  75 

Some  statutes  in  various  states  enact  this  to  be 
the  rule,  and  elsewhere  the  courts  have  come  to 
that  view  without  the  aid  of  any  statute.  It  is  the 
law  everywhere  that  if  stock  is  issued  for  property 
or  services  purposely  overvalued,  it  is  unpaid  to  the 
extent  of  the  overvaluation.  Even  where  the  "good 
faith"  rule  prevails,  there  is  such  a  thing  as  "con- 
structive fraud,"  that  is,  such  a  gross  overvaluation 
that  in  law  it  must  be  considered  fraudulent 

Sec.  36.  CALLS  FOR  PAYMENT.  Stock  may  be 
Issued  for  payment  to  be  made  at  once  or  on  call.  If 
on  call,  there  Is  no  debt  due  until  the  call  Is  made,  but 
If  the  corporation  fails  the  subscription  Is  due  at  once 
without  call. 

If  it  is  the  agreement  that  stock  or  some  part 
thereof  is  not  to  be  due  until  a  call  is  made,  then 
such  call  is  necessary  before  the  stockholder's  debt 
arises  upon  his  subscriptions;  and  he  cannot  be 
sued  until  such  call  is  made;  neither  will  the  stat- 
ute of  limitations  run  in  his  favor  until  such  call. 

A  call  is  made  by  the  directors. 

A  call  is  not  necessary  if  the  corporation  becomes 
insolvent  and  comes  under  the  jurisdiction  of  a 
court  of  equity  or  bankruptcy  for  the  distribution 
of  its  assets  among  creditors.  All  subscriptions  are 
then  immediately  due,  and  payment  will  be  enforced 
to  the  extent  necessary  for  the  payment  of  debts. 

A  call  is  not  necessary  to  enable  the  corporation 
to  enforce  payment  unless  the  agreement  is  that 
the  payment  or  some  installment  or  installments 
thereof  are  not  to  be  paid  until  a  call  is  made.  But 
if  no  date  is  mentioned  for  payment,  the  rule  is 


76  COBPOBATIONS. 

generally  adopted  that  a  call  Is  then  necessary.  A 
subscriber  may,  however,  pay  at  any  time,  though  no 
call  has  been  made. 

Sec.  37.  PAYMENT  REQUIRED  BY  STATUTE  AS 
A  RIGHT  PRECEDENT  TO  CORPORATE  LIFE.  In 
various  states  statutes  provide  that  a  certain  percentage 
of  the  stock  subscriptions  must  be  actually  paid  In. 

The  statutes  of  the  various  states  must  be  con- 
sulted with  reference  to  this  subject.  As  an  illus- 
tration, the  State  of  Illinois  requires  that  fifty  per 
cent  of  all  the  stock  of  the  corporation  (all  of  which 
must  be  subscribed  for)  must  be  paid  in.  This 
means  that  either  the  stock  of  one-half  of  the  sub- 
scribers must  all  be  paid  for,  or  that  various  stock- 
holders pay  enough  to  equal  at  least  one-half  of  the 
capitalization. 

Sec.  38.  FORFEITURE  OF  STOCK  FOR  NON-PAY- 
MENT.  In  the  absence  of  provisions  in  the  by-laws 
or  charter  passed  prior  to  the  Issue  of  the  shares  In- 
volved, there  was  no  common  law  right  of  forfeiture 
for  non-payment  of  shares.  But  that  right  is  given 
quite  generally  by  statute. 

In  case  a  subscriber  does  not  pay  for  his  stock, 
the  right  is  usually  given  to  declare  a  forfeiture 
of  that  stock.  That  right,  however,  is  entirely 
statutory,  and  the  provisions  of  the  statute  must 
be  observed.  It  is  usually  provided  that  the  stock 
must  be  sold  and  if  any  surplus  remains  after  the 
debt  is  paid  from  the  proceeds  of  the  sale,  the  sub- 
scriber is  entitled  thereto.  But  if  a  deficiency  result, 
the  delinquent  stockholder  is  liable  therefor. 


CHAPTER  8. 


RIGHTS  OF   STOCKHOLDERS. 

Sec.  39.  IN  GENERAL.  A  stockholder,  as  such, 
has  no  voice  In  the  management  of  the  corporation 
except  as  he  votes  at  stockholders'  meetings,  but  he 
has  a  right  to  Insist  that  ths  management  be  honest 
and  along  the  lines  of  the  legitimate  corporate  pur- 
poses and  he  has  a  right  to  know  what  Is  going  on. 
He  may  apply  to  the  court  In  proper  cases  to  protect 
these  rights.  A  stockholder  may  freely  contract  with 
the  corporation  and  thereby  secure  special  rights 
against  It. 

We  have  already  considered  the  status  of  the 
shareholder.  It  remains  for  us  in  this  chapter  to 
consider  certain  of  his  rights.  Though  he  may  not, 
except  at  stockholders'  meetings,  have  any  voice  in 
affairs  of  the  corporation,  yet  he  has  many  rights  in 
the  way  of  protection  of  his  interests  which  he  may 
assert  outside  of  stockholders'  meetings.  He  has  a 
right  to  know  what  is  going  on ;  to  that  end  he  may 
inspect  the  books  of  the  company.  He  has  a  right 
to  insist  that  the  corporation  shall  pursue  its  proper 
corporate  activities  and  none  other;  to  that  end  he 
may  apply  to  the  courts  for  an  injunction  or  other 
relief.  He  has  a  right  to  receive  dividends ;  for  that 
is  the  ultimate  purpose  of  the  corporation.  Besides 
these  rights  which  he  has  as  a  stockholder  he  may 
have  other  rights  growing  out  of  special  contract, 

(77) 


78  COBPOBATIONS. 

for  we  shall  consider  in  this  chapter  that  a  stock- 
holder is  under  no  disability  to  contract  with  the 
corporation  in  respect  to  matters  upon  which  other 
parties  might  contract.  These  rights  are  considered 
in  the  following  sections  of  this  chapter. 

At     The  Rights  Growing  Out  of  the  Stockholders' 
Relationship,   as   Such. 

Sec.  40.  STOCKHOLDERS'  RIGHTS  TO  DIVIDENDS. 
The  directors  have  a  discretion  In  the  declaration 
of  dividends;  but  if  this  discretion  Is  clearly  abused,  a 
court  of  equity  will  compel  such  declaration. 

Dividends  are  not  payable  except  upon  a  declara- 
tion by  the  directors.  Though  the  corporation  has 
a  surplus  out  of  which  it  clearly  could  and  perhaps, 
ought,  to  pay  dividends,  yet  so  long  as  no  dividends 
have  been  declared,  none  are  payable.  A  stock- 
holder cannot  bring  suit  against  the  corporation  for 
his  dividend  until  after  it  has  been  declared,  for 
until  that  time  there  is  no  dividend  due.  Neither 
will  the  court  at  the  instance  of  a  stockholder,  or  the 
whole  body  of  stockholders,  declare  a  dividend  and 
then  order  it  paid  or  give  judgment.  What  remedy 
then,  has  a  stockholder? 

First  let  it  be  noted  that  the  directors  have  a 
discretion  in  declaring  dividends.  This  is  true  not 
only  in  regard  to  common,  but  even  in  regard  to 
preferred  stock,  dividends  upon  which,  as  in  the  case 
of  common  stock,  arc  not  payable  until  a  dividen-1 
has  been  declared.  And  this  discretion  is  a  large 
discretion  in  the  case  of  common  stock. 

Yet,  after  all,  the  purpose  of  the  corporation  is 
that  of  profit  for  its  stockholders.  That  purpose 


AMERICAN  COMMERCIAL  LAW.  79 

cannot  be  indefinitely  defeated.  Accordingly,  the 
law  has  been  established  that  if  the  directors  are 
withholding  the  declaration  fraudulently  or  in  bad 
faith,  then  a  stockholder,  upon  making  that  appear, 
may  have  a  decree  against  them  in  a  court  of  equity 
that  they  declare  a  dividend. 

Sec.  41.  RIGHT  OF  STOCKHOLDER  TO  PREVENT 
ULTRA  VIRES  ACTS.  A  stockholder  may,  If  he  have 
no  other  means  of  relief,  secure  an  Injunction  to  pre- 
vent the  directors  or  other  officers  of  the  corporation 
from  carrying  out  ultra  vires  acts,  or  secure  a  rescis- 
sion of  them  If  executed. 

Much  in  the  same  way  that  a  citizen  and  taxpayer 
of  a  municipality  may  file  a  bill  in  a  court  of  equity 
to  prevent  the  officers  of  the  municipality  from  pay- 
ing out  money  on  uses  alleged  to  be  illegal  or  upon  or- 
dinances alleged  to  be  void,  so  may  the  stockholder 
in  a  corporation  prevent  the  doing  of  those  things 
which  are  beyond  the  power  of  ("ultra  vires"}  the 
corporation.  And  if  without  such  stockholder's  con- 
sent or  negligence,  the  officers  of  the  corporation 
have  executed  illegal  contracts,  rescission  of  them 
may  be  obtained  by  the  stockholder. 

In  such  case,  the  stockholder  must  not  be  guilty 
of  unexcused  delay  in  bringing  his  suit,  or  of  ac- 
quiescence in  the  act.  He  must  also  show  that  by 
an  appeal  to  the  other  stockholders  or  to  the  direct- 
ors he  could  not  thereby  secure  relief,  either  showing 
that  he  has  made  such  an  appeal  or  that  it  would 
have  been  unavailing,  if  made. 


80  CORPORATIONS. 

Sec.  42.  RIGHT  OF  STOCKHOLDER  TO  PREVENT 
A  CHANGE  OF  THE  CHARTER  IN  MATERIAL  RE- 

SPECTS.  A  stockholder  may  prevent  a  change  in  ob- 
ject, amount  of  capitalization,  etc.,  unless  change  la 
sought  according  to  a  general  law  authorizing  such 
change  by  a  vote  of  a  certain  percentage  of  the  stock- 
holders, and  this  law  was  in  force  when  the  corporation 
was  formed. 

There  are  now  in  most,  or  all  of  the  states,  laws 
which  give  the  stockholders  of  a  corporation  a  right 
to  call  a  meeting  for  the  purpose  of  voting  whether 
or  not  the  corporation  shall  seek  an  amendment  of 
its  charter  to  change  or  enlarge  its  purposes,  to  in- 
crease or  decrease  its  capital  stock,  and  to  change 
its  name,  etc.  If  a  certain  per  cent,  named  in  the 
statute,  say  two-thirds,  vote  for  such  a  change,  there 
is  a  right  under  the  statutes  to  secure  it.  A  stock- 
holder becomes  a  member  of  a  corporation  subject 
to  this  right  of  the  majority  according  to  the  stat- 
ute.10 

Sec.  43.  RIGHT  OF  STOCKHOLDER  TO  INSPECT 
CORPORATE  BOOKS  AND  RECORDS.  A  stockholder 
may  for  the  protection  of  his  interests  inspect  the 
books  and  records  of  the  company.  His  purpose,  how- 
ever, must  be  legitimate.  He  has  no  right  to  Inspect 
the  books  to  gratify  Idle  curiosity  or  to  secure  Informa- 
tion for  the  purpose  of  wrecking  or  injuring  the  cor- 
poration. And  he  must  apply  at  a  suitable  hour,  and 
must  not  Impede  the  proper  business  routine  of  the 
corporation. 

The  directors  and  officers  of  the  corporation  per- 
form their  functions  and  keep  the  books  for  the 

10.    Smith  r.  Eastwood,  etc.,  Co,  68  N.  J.  Eq.  831. 


AMEBICAN  COMMEBCIAL  LAW.  81 

benefit  of  the  real  owners  of  the  corporation,  the 
stockholders.  Accordingly  it  is  the  stockholder's 
right  to  see  the  books  of  the  corporation  in  which 
the  activities  of  the  corporation  are  recorded  and 
to  take  such  copies  thereof  as  necessary  to  make 
such  inspection  of  avail.  He  need  not  show  that  the 
business  of  the  corporation  is  being  mismanaged. 
He  need  only  show  that  he  is  a  stockholder  and  that 
his  purpose  is  a  legitimate  one,  though  under  some 
statutes  he  need  not  show  what  his  purpose  is.  This 
right  of  inspection  the  stockholder  may  enforce  by 
mandamus  proceedings.11 

B.      Rights  Growing  Out  of  Special  Contracts  Made  by 
Corporation  with  Stockholders. 

Sec.  44.  RIGHT  OF  STOCKHOLDER  TO  CONTRACT 
AND  DEAL  WITH  CORPORATION.  A  stockholder  may 
enter  Into  contracts  with  the  corporation  to  the  same 
extent  as  any  person,  except  In  reference  to  his  sub- 
scription to  stock,  In  which  case  the  rights  of  creditors 
must  be  considered. 

As  the  corporation  has  an  entity  distinct  from  its 
stockholders,  the  stockholders  may  contract  with  it 
and  become  its  creditors,  and  as  such  creditors, 
(but  not  as  stockholders)  may  compete  with  other 
creditors.  Any  contract,  then,  made  by  the  stock- 
holder not  in  his  capacity  as  stockholder  puts  him 
on  a  level  with  any  other  creditor. 

11.  Stone  v.  Kellogg,  165  111.  192;  Venner  v.  Chicago  City 
Ry.  Co.,  240  111.  170. 


82  COBPOBATIONS. 

8eo.  45.  RIGHT  OF  STOCKHOLDER  TO  CON- 
TRACT  WITH  RESPECT  TO  THE  STOCK  SUBSCRIP- 
TION. The  subscription  must  be  paid  at  Its  par  value 
In  money  or  money's  worth.  Any  contract  with  the 
corporation  seeking  to  evade  this  liability  is  not  bind- 
ing as  to  the  creditors. 

We  have  already  considered  the  subject  of  pay-, 
ment  for  stock.  Creditors  may  insist  that  the  full 
par  value  be  paid.  So,  for  the  same  reasons  any  con- 
tract with  the  corporation  that  stock  shall  be  is- 
sued in  the  first  instance  at  a  discount,  or  that  the 
liability  of  the  stockholder  shall  be  released,  in  whole 
or  part,  or  that  a  demand  against  him  shall  be  com- 
promised are  not  binding  on  creditors. 

It  has  been  held,  however,  in  a  number  of  cases 
that  if  the  subscriber  is  insolvent,  a  compromise 
made  with  him  in  good  faith  and  for  the  benefit  of 
the  corporation,  is  binding. 


CHAPTER  9. 

STOCKHOLDERS'  MEETINGS. 
A.     In  General. 

Sec.  46.  RIGHT  OF  STOCKHOLDERS  TO  HOLD 
AND  ATTEND  MEETINGS.  The  stockholders  have  a 
right  to  hold  and  attend  meetings  for  the  purpose  of 
transacting  all  such  business  as  properly  comes  before 
them. 

The  stockholders  cannot  act  except  at  stockhold- 
ers' meetings.  It  is  fundamental  that  they  have  the 
right  to  meet  in  order  to  elect  directors,  pass  by-laws 
when  that  power  is  in  them,  and  perform  other 
constituent  acts  or  any  business  that  properly  comes 
before  them.  Usually  the  by-laws  set  forth  with 
considerable  fullness  the  time  and  place  of  stated 
meetings  and  the  manner  of  calling  special  meetings. 
The  statutes  of  some  of  the  states  also  provide  how 
special  meetings  may  be  called. 

If  there  is  any  attempt  to  block  the  proper  calling 
of  the  stockholders'  meetings,  the  courts  may  be 
appealed  to,  and  by  mandamus,  injunction,  or  other- 
wise, will  fully  protect  the  rights  of  the  stockholders. 

Sec.  47.  PURPOSE  OF  STOCKHOLDERS'  MEET- 
INGS.  The  commonest  purpose  of  stockholders'  meet- 
Ings  Is  to  elect  directors,  hear  reports  of  officers,  vote 
upon  changes  In  the  charter,  or  any  matter  requiring 

(83) 


84  COBPORATIONS. 

the  action  of  the  shareholders.  But  any  matter  touch- 
Ing  the  welfare  or  management  of  the  corporation  may 
properly  come  up  for  discussion,  approval  or  authoriza- 
tion. 

The  stockholders'  meetings  are  for  the  purpose  of 
enabling  the  stockholders  to  get  together  to  pro- 
tect their  interests  and  do  those  fundamental  and 
constituent  things  which  properly  they  must  do.  If 
there  is  to  be  an  increase  or  a  decrease  of  the  cap- 
ital stock,  the  stockholders  must  vote  upon  it ;  if  there 
are  directors  to  be  elected  a  meeting  is  necessary 
for  that  purpose.  And,  also,  there  is  a  great  deal 
taken  up  and  considered  which  is  not  strictly  neces- 
sary to  be  brought  before  the  stockholders,  yet  which 
it  is  often  for  their  benefit  to  discuss.  They  hear 
reports  from  various  officers,  they  approve  by 
formal  vote  the  acts  of  the  directors  and  other  of- 
ficers, they  authorize  acts  which  the  directors  might 
neverthless  have  legal  right  to  do  but  which  they 
now  have  also  the  moral  sanction  of  the  stockholders 
to  do.  They  enlighten  the  directors  as  to  their 
desires  in  reference  to  the  policy  of  the  corporation ; 
they  lend  to  or  withdraw  from  certain  activities 
their  moral  support;  and  thus  in  an  indirect  way 
they  control  the  management  of  the  corporation. 
The  directors,  we  will  find,  have  large  powers  and 
in  their  hands  rests  the  immediate  management  of 
the  corporation  and  they  can  carry  on  the  regular 
business  of  the  corporation  without  any  special  au- 
thority from  the  stockholders,  and  the  stockholders 
cannot  by  action  in  the  stockholders'  meeting,  usurp 
the  offices  of  the  directors.  Yet  with  all  of  this,  the 
moral  support  of  the  stockholders  is  very  much  to 


!Aj£EBICAN  COMMEBOIAL  LAW.  85 

be  desired,  and  when  stockholders  express  them- 
selves definitely  concerning  the  policy  of  the  cor- 
poration, this,  of  course,  has  much  influence  upon 
the  directors. 

Stockholders'  meetings,  then,  are  for  manifold 
purposes — to  enable  the  stockholders  to  do  those 
things  which  they  alone  can  do;  to  enable  them  to 
state  in  concert  and  put  of  record  their  views  as 
to  the  corporate  policy  for  the  guidance  of  the 
directors;  and  to  enable  them  by  discussion  together 
to  work  out  corporate  problems. 

B.     Regular  and  Special   Meetings. 

Sec.  48.  THE  ANNUAL  AND  OTHER  REGULAR 
MEETINGS.  The  most  Important  regular  meeting  Is 
the  annual  meeting  and  in  many  corporations  there  is 
no  other  stated  meeting.  The  time  and  place  of  this 
annual  meeting  is  fixed  in  the  by-laws.  At  this  meet- 
Ing  the  directors  are  elected  and  other  business  done. 

Corporations  may  provide  for  a  number  of  regular 
meetings  throughout  the  year,  but  usually  there  is 
only  one  regular  meeting — the  annual  meeting.  In 
any  event,  it  is  the  most  important  regular  meeting. 
At  this  meeting  reports  are  read,  directors  are  elected 
and  other  important  business  performed. 

Much  that  is  said  throughout  this  chapter  applies 
to  regular  or  annual  meetings  and  reference  is  there- 
fore made  to  the  other  sections  in  this  chapter  for 
other  particulars  in  respect  to  the  annual  meeting. 


86  CORPORATIONS. 

See.  49.  SPECIAL  MEETINGS.  Special  meetings 
may  b«  called  at  any  time  as  occasions  require,  pur- 
suant to  the  provisions  In  the  by-laws  or  by  common 
consent.  If  there  is  no  provision  in  the  by-laws,  the 
directors  call  special  meetings.  Statutes  also  give  a 
certain  percentage  of  the  stockholders  the  right  to  call 
special  meetings. 

It  is  often  important  to  call  the  stockholders  to- 
gether at  various  times  to  take  care  of  some  emer- 
gency that  has  arisen.  The  by-laws  should  provide 
for  the  calling  of  such  meetings.  No  business  can 
be  performed  at  such  meeting  except  that  which 
is  stated  in  the  call  unless  all  of  the  stockholders 
are  present. 

See  the  other  sections  throughout  this  chapter 
for  further  treatment. 

C.     Calls,  Notices  and  Waiver*. 

Sec.  50.  NOTICE  OF  ANNUAL  MEETING.  Notice 
of  the  annual  meeting  is  necessary  where  the  by-laws 
so  provide.  If  there  is  no  provision  In  reference  to 
notice,  some  courts  have  held  that  It  Is  not  necessary. 
Yet  as  a  matter  of  prudence  such  notice  should  be 
given  and  It  Is  better  for  the  by-laws  to  provide  for 
notice. 

The  annual  meeting  need  not,  of  course,  be  called, 
but  the  by-laws  customarily  provide  that  notice 
shall  be  given.  It  is  better  and  is  the  usual  practice 
to  give  notice  of  such  annual  meeting,  and  to  provide 
for  the  notice  in  the  by-laws. 


AMERICAN  COMMEBCIAL  LAW.  87 

Sec.  51.    CALL  AND  NOTICE  OF  SPECIAL  MEET- 

INQ.  Who  may  call  special  meeting*  has  been  Indi- 
cated. Notice  of  such  meeting  must  be  given  to  every 
stockholder  registered  upon  the  books,  the  time  and 
place  and  purpose  of  such  meeting  must  be  stated  in 
the  call  and  notice. 

We  have  seen  who  may  call  special  meetings.  No- 
tice of  them  must  be  given  to  every  stockholder  and 
this  notice  must  state  the  time  and  place  of  the 
meeting  and  the  purpose  thereof.  No  other  busi- 
ness than  that  specified  in  the  notice  can  be  done, 
unless,  indeed,  all  of  the  stockholders  are  present. 

The  secretary  sends  out  the  notices  of  the  meet- 
ing. 

Sec.  52.  WAIVER  OF  NOTICE  OF  MEETINGS.  The 
right  to  the  notice  provided  by  statute  or  by-law  may 
be  waived  by  the  stockholder. 

A  stockholder  has  a  right  to  waive  the  notice  in- 
tended for  his  benefit.  By  this  means  it  is  possible 
to  have  meetings  called  immediately  without  waiting 
the  prescribed  time.  Various  forms  are  used  for 
this  purpose.  One  is  the  call  and  waiver  comprised 
in  one  instrument  where  the  stockholders  appear  as 
calling  the  meeting  and  at  the  same  time  waiving 
statutory  or  by-law  notices. 

D.     Attendance  and  Vote. 

Sec.  53.  ATTENDANCE  MAY  BE  IN  PERSON  OR 
BY  PROXY.  A  stockholder  may  be  present  and  vote 


88  CORPORATIONS. 

at  any  regular  or  special  meeting  In  person  or  by 
proxy.  The  proxy's  authority  may  be  revoked  at  any 
time,  though  in  terms  irrevocable. 

A  stockholder  may  attend  personally  or  he  may 
send  some  one  to  attend  for  him.  His  representa- 
tive is  called  a  proxy  and  that  is  the  name  given 
also  to  his  letter  of  authority,  or  it  is  called  his 
"letter  of  proxy."  It  has  been  held  that  the  proxy 
is  always  revocable,  even  though  its  terms  may  state 
that  it  is  irrevocable. 

This  proxy  is  usually  of  very  general  nature,  giv- 
ing the  representative  full  power  to  act  on  all  ques- 
tions that  may  arise.  It  should  be  produced  and 
placed  in  the  records. 

Sec.  54.  VOTING  POWERS  OF  TRUSTEES,  EX- 
ECUTORS,  ADMINISTRATORS,  AND  PLEDGEES. 
Trustees,  executors  and  administrators  have  the  right 
to  be  registered  as  stockholders  and  may  vote  the  stock 
they  hold  In  trust.  But  pledgees  by  law  In  many  states 
have  no  right  to  vote  the  stock,  because  the  pledger 
remains  the  stockholder  and  his  transfer  has  not  been 
for  the  purpose  of  making  the  pledgee  a  stockholder 
but  to  give  him  security. 

If  stock  has  been  transferred  to  one  in  trust,  or 
if  he  has  acquired  it  as  executor  or  administrator 
of  the  former  owner,  he  may  have  himself  registered 
upon  the  books  as  owner  and  vote  the  stock  which 
he  holds  in  that  capacity.  Indeed,  it  has  been  held 
in  many  cases  that  an  executor  or  administrator  can 
vote  the  stock  standing  in  the  name  of  the  deceased, 
without  the  formality  of  having  himself  enrolled  upon 
the  books,  provided  he  shows  the  proper  evidence  of 


AMERICAN  COMMEBCIAL  LAW.  89 

his  title,  that  is,  a  certified  copy  of  his  letters  of 
adminisration  or  letters  testamentary. 

A  pledgee  may  stand  upon  a  different  footing. 
If  A.  borrows  $50  from  B.,  and  as  security  transfers 
a  stock  certificate  in  the  M.  corporation  to  B.,  B.  is 
not  thereby  made  a  stockholder.  It  may  not  be  the 
contract  of  the  parties  that  B.  shall  become  a  stock- 
holder even  upon  default  by  A.,  but  B.  must  sell  the 
certificate,  pay  his  debt  out  of  the  proceeds  and 
turn  over  the  surplus,  if  any,  to  A.,  the  purchaser 
at  the  sale  becoming  the  stockholder.  In  order  to 
enable  B.  thus  to  enforce  his  rights,  the  stockholder 
signs  the  power  of  attorney  on  the  back  of  his  cer- 
tificate and  hands  the  certificate  to  B.,  and  B.  might, 
by  virtue  of  his  possession  of  the  certificate,  so  en- 
dorsed, have  himself  registered  as  a  stockholder  and 
vote  the  stock  and  receive  dividends.  Yet  if  this  has 
not  been  the  special  contract  of  the  parties,  B.  has 
no  right  to  do  this  and  A.  can  according  to  some 
statutes  by  a  proper  showing  of  his  status  assert  his 
rights. 

A  corporation  cannot  vote  unissued  or  treasury 
stock. 

Sec.  55.  VOTING  TRUSTS.  The  stockholders,  or 
certain  of  them,  may  place  their  certificates  In  the 
possession  of  some  person  to  hold  the  stock  In  trust 
for  a  certain  period  for  the  limited  purpose  of  voting  it 
at  corporate  meetings. 

A  voting  trustee  is  one  to  whom  all  or  several 
stockholders  of  a  corporation  have  transferred  their 
stock  in  trust  to  be  transferred  to  them  upon 
demand  or  after  a  certain  period,  meanwhile  to  hold 


90  CORPORATIONS. 

it  for  the  purpose  of  voting  it,  and  for  no  other  pur- 
pose. Such  stockholders  receive  the  dividends  dur- 
ing such  periods  and  are  in  reality  the  stockholders, 
though  divested  of  the  record  title  for  the  purposes 
mentioned.  This  arrangement  is  usually  held  to  be 
legal,  and  the  stockholder  is  bound  by  it  until  the 
time  stated  has  expired.  It  is  legal  notwithstanding 
only  a  portion  of  the  stockholders  are  represented 
for  the  rights  of  the  others  are  thereby  not  affected. 

The  purpose  of  such  a  voting  trust  is  to  secure 
the  continuity  of  management  and  policy  for  a 
considerable  time  as  desired  by  those  who  are  parties 
to  the  trust. 

The  stockholder  should  have  from  the  voting  trus- 
tee a  certificate  or  some  sort  of  a  contract  assert- 
ing his  rights. 

A  voting  trust  whereby  the  stockholders  of 
several  corporations  combine  to  put  the  management 
of  the  several  corporations  in  the  hands  of  a  com- 
mon trustee  or  body  of  trustees  for  the  purpose  of 
stifling  competition  between  such  corporations,  is 
illegal.11* 

Sec.  56.  WHO  ENTITLED  TO  VOTE.  CLOSING 
BOOKS.  Those  who  appear  upon  the  books  of  the  com- 
pany  to  be  its  stockholders  are  prima  facie  entitled  to 
vote.  The  books  may  be  closed  for  a  reasonable  time 
before  the  meeting  to  prepare  a  list  of  the  stockholders 
entitled  to  vote. 

The  corporation  usually  looks  to  its  books  and 
not  to  outstanding  certificates  to  determine  who  are 
stockholders.  Often  the  transfer  books  will  be 

lla.  See  Sec.  125,  post. 


AMERICAN  COMMERCIAL  LAW.  91 

closed  at  a  certain  time,  as  for  instance,  at  noon  of 
the  day  preceding  the  date  of  the  meeting,  and  if  this 
is  reasonable  in  view  of  the  number  of  stockholders 
and  other  circumstances,  to  enable  the  secretary  to 
prepare  a  list  of  the  qualified  stockholders,  it  is  a 
valid  provision,  but  the  by-laws  should  be  explicit. 

Sec.  57.  CALLING  THE  ROLL.  It  Is  Important  that 
the  roll  of  those  present  be  taken  and  preserved,  to- 
gether with  the  proxy  of  those  who  so  appear. 

If  the  stockholders  of  a  company  are  few  in  num- 
ber the  enrollment  of  those  present  at  any  meeting 
is  a  very  simple  matter.  If  the  stockholders  are 
quite  numerous  but  a  roll  may  be  called  in  a  few 
minutes,  then  such  roll  should  be  called  by  the  sec- 
retary. If  the  stockholders  are  so  numerous  that 
calling  the  roll  is  out  of  the  question,  then  the  stock- 
holders may  come  forward  and  indicate  their  pres- 
ence and  file  what  proxies  they  hold  for  other  stock- 
holders. 

The  record  of  those  who  are  present  at  any  meet- 
ing should  be  carefully  preserved  by  the  secretary. 

Sec.  58.  QUORUM.  A  governing  statute  or  the  by- 
laws may  provide  what  shall  constitute  a  quorum.  In 
the  absence  of  any  such  a  provision  those  who  are 
present  at  any  regularly  called  meeting  constitute  a 
quorum  no  matter  how  few  they  may  be.  If  a  quorum 
Is  not  present  no  business  can  be  done,  but  those  pres- 
ent may  adjourn  to  another  time. 

The  laws  of  some  states  provide  that  a  majority  or 
some  percentage  shall  constitute  a  quorum.  In  the 
absence  of  such  a  statutory  provision  the  matter 
should  be  governed  by  the  by-laws.  Otherwise  a 


92  COBPOBATIONS. 

quorum  is  constituted  by  any  number  who  attend  in 
a  regular  or  regularly  called  meeting.  That  is  not 
so  in  a  directors'  meeting.  In  such  case  a  majority 
must  be  present. 

Where  a  quorum  is  present  a  majority  thereof 
may  carry  motions  and  transact  business. 

Directors  in  their  meetings  have  one  vote  each.  But 
a  stockholder  in  a  stockholders'  meeting  has  as  many 
votes  as  he  has  shares  of  stock.  The  share  of  stock  is 
the  unit.  Thus  if  one  holds  a  majority  of  the  stock 
he  may  outvote  the  holders  of  the  minority,  be  they 
ever  so  numerous. 

In  order  to  give  these  minority  stockholders  a 
chance  to  be  represented  in  the  directorate,  cumula- 
tive voting  is  provided  for,  as  discussed  in  the  next 
section. 

Sec.  59.  RIGHT  TO  CUMULATE  VOTE.  By  stat- 
ute and  by-law  the  right  to  cumulate  votes  Is  sometimes 
given. 

What  the  cumulation  of  a  vote  is  may  be  thus  ex- 
plained. Three  directors  are  to  be  elected.  A  stock- 
holder may  cast  one  vote  per  share  held  by  him  for 
each  director,  or  three  votes  per  share  for  one  direc- 
tor. If  the  minority  stockholders  cast  their  vote  in 
concert  they  may  thus  elect  a  director.  This  right 
does  not  exist  by  the  common  law  but  some  of  the 
state  statutes  give  it.  And  the  by-laws  may  provide 
for  it. 

E.     Organizing  the  Meeting  and  Transacting  Business. 

Sec.  60.  THE  OFFICERS  OF  THE  MEETING.  The 
meeting  selects  Its  own  chairman  and  secretary,  unless 
It  la  otherwise  provided  In  the  by-laws.  The  president 


AMBBICAN  COMMEECIAL  LAW.  93 

or  some  other  person  can  serve  as  chairman,  but  the 
secretary  of  the  corporation  should  be  the  secretary  of 
the  stockholders'  meeting. 

The  by-laws  may  provide  that  the  regular  officers 
of  the  corporation  shall  act  as  the  officers  of  the 
meetings  of  the  stockholders.  In  the  absence  of  any 
such  a  provision  the  meeting  can  proceed  to  the  elec- 
tion of  its  own  officers.  The  secretary  chosen  should 
always  be  the  secretary  of  the  corporation  as  he  has 
charge  of  the  records  and  is  familiar  with  the  situa- 
tion. 

Sec.  61.  ORDER  OF  BUSINESS.  An  order  of  busi- 
ness approved  by  usage  in  deliberative  bodies  should 
be  adopted. 

Having  some  approved  order  to  follow  facilitates 
the  conduct  of  business,  and  assists  the  secretary  in 
making  the  minutes.  See  the  form  of  by-laws  set 
out  in  the  Appendix  for  a  suggested  order.  This 
order  although  prescribed  in  the  by-laws  may  be  de- 
parted from  whenever  for  some  reason  another  or- 
der is  desired. 

Sec.  62.  ADJOURNMENT.  The  meeting  may  either 
adjourn  sine  die,  or  may  adjourn  to  some  later  date 
If  all  business  is  not  disposed  of. 

If  all  business  is  disposed  of  then  the  meeting  ad- 
journs sine  die.  If  several  sessions  are  required 
to  dispose  of  the  business  in  hand,  an  adjournment  to 
a  particular  time  may  be  had.  Where  there  is  an 
adjourned  meeting  no  notice  of  that  meeting  is  nec- 
essary, as  the  stockholder  receiving  notice  of  the 


94  COBPOBATIONS. 

meeting  must  take  notice  of  its  adjournments.  At 
an  adjourned  special  meeting  no  other  business  can 
be  transacted  than  could  have  been  at  the  original 
session. 

F.     Minutes  of  the  Meeting. 

Sec.  63.  DEFINITION  OF  MINUTES.  The  minutes 
constitute  the  secretary's  record  of  the  business  of  the 
meeting. 

The  minutes  comprise  the  record  of  the  meeting. 
These  minutes  should  be  a  recital  in  orderly  form 
of  all  business  disposed  of.  Debates,  discussions,  etc., 
should  not  be  set  down,  but  all  resolutions  should 
appear,  whether  passed  or  lost.  It  is  better  to  state 
on  whose  motion  and  second  the  resolution  was  in- 
troduced. The  minutes  of  a  small  corporation  should 
contain  the  record  of  those  present  and  whether  in 
person  or  by  proxy,  but  in  very  large  corporations 
this  is  not  practicable,  and  in  that  case  the  record 
of  those  present  is  kept  by  means  of  a  list.  By  ref- 
erence to  any  conventional  form  of  minutes,  one  can 
readily  infer  what  the  minutes  should  contain. 

Sec.  64.  LEGAL  EFFECT  OF  MINUTES.  The 
minutes  are  the  legal  evidence  of  what  transpired  at  the 
meeting. 

The  minutes  become  the  legal  evidence  of  what 
was  done  at  the  meeting,  consequently  they  should 
be  very  carefully  and  accurately  kept. 


AMEBICAN  COMMEBOIAL  LAW.  95 

Sec.  65.  APPROVAL  OF  MINUTES.  Minutes  of 
any  special  or  regular  stockholders'  meeting  can  be  read 
and  approved  or  corrected  at  the  next  regular  stock- 
holders' meeting.  But  the  minutes  of  a  special  or 
regular  meeting  cannot  be  approved  at  another  special 
meeting. 

The  minutes  are  read  and  approved  or  corrected 
at  the  following  regular  meeting.  If  corrected  by 
a  majority  of  the  stockholders  the  correction  must 
be  made  by  the  secretary  though  he  contend  that 
they  are  correct.  The  original  minutes  with  the 
correction  should  appear  after  the  correction  has 
been  made.  This  can  be  accomplished  by  crossing 
out  the  corrected  part  leaving  the  words  still  legible 
and  writing  in  the  correction  with  red  ink. 

The  secretary  has  charge  of  the  minute  book. 


CHAPTER  10. 


TRANSFER  OF  STOCK. 

Sec.  66.  TRANSFERABILITY  OF  STOCK.  Stock 
may  be  sold,  mortgaged  or  pledged.  The  transferee  of 
stock  acquires  the  rights  of  the  transferor,  but  usually 
cannot  take  any  further  or  larger  rights. 

One  purpose  of  incorporating,  as  we  have  seen,  is 
to  give  ready  transferability  of  shares.  Shares  of 
capital  stock  are  readily  transferable,  and,  as  we 
know,  are  bought  and  sold  on  the  market,  in  great 
quantities,  every  day. 

We  say  that  stock  is  transferable  or  assignable, 
not  negotiable.  One  wfio  buys  stock  usually  stands 
in  the  same  position  as  his  transferor.  Yet  he  may 
have  better  rights  where  he  relies  upon  recitals  made 
by  the  corporation  in  respect  to  the  stock. 

Sec.  67.  METHOD  OF  TRANSFER.  The  ordinary 
method  of  transfer  is  by  indorsement  and  delivery  of 
stock  certificate,  its  surrender  at  the  office  of  the  cor- 
poration for  a  new  certificate,  and  the  enrollment  of 
the  name  of  the  transferee  upon  the  books  of  the  cor- 
poration as  a  stockholder. 

Where  a  stockholder  has  a  certificate  made  out  in 
his  name  and  in  the  usual  form,  reciting  that  he  is 
the  owner  of  a  certain  number  of  shares  of  stock, 
the  transfer  of  such  stock  to  another  may  be  accom- 
plished in  this  way :  the  present  holder  signs  his  name 

(96) 


AMERICAN  COMMERCIAL  LAW.  97 

to  the  blank  power  of  attorney,  which  is  upon  the 
back  of  the  certificate,  either  leaving  the  form  in 
its  blank  condition  or  filling  up  the  blank  with  the 
name  of  the  transferee,  the  certificate  so  endorsed 
is  delivered  to  the  transferee,  and  taken  by  him  to 
the  office  of  the  company  where  it  is  delivered  up  for 
a  new  certificate  in  the  name  of  the  transferee,  and 
such  transferee  is  enrolled  upon  the  books  of  the 
corporation  as  a  stockholder.  One  becomes  a  stock- 
holder from  the  time  of  the  transfer  of  the  certifi- 
cate, but  he  secures  full  protection  as  a  stockholder 
by  having  his  name  enrolled  upon  the  books  as  a 
stockholder,  for  as  we  have  seen,  a  corporation  looks 
to  its  books  to  determine  who  are  its  stockholders. 
Before  such  enrollment  one  might  be  entitled  to  no- 
tices, dividends,  etc.,  but  he  would  not  be  fully  pro- 
tected in  receiving  them. 

One  who  purchases  stock  expecting  to  resell  it, 
does  not  always  have  himself  entered  upon  the  books 
as  a  stockholder,  but  the  certificate,  endorsed  in 
blank,  may  pass  through  many  hands  without  any 
record  being  made  of  its  changing  ownership.  Thus 
if  a  certificate  is  made  out  to  William  Brooks,  he 
could  sign  the  indorsed  power  of  attorney  in  blank, 
so  that  the  transferee  could  fill  in  his  name  or  not 
as  he  chose,  such  transferee  could  resell  to  A.,  and 
A.  to  B.,  and  B.  to  C,  by  simple  delivery  of  the 
same  certificate  so  signed  in  blank  by  William 
Brooks,  and  the  last  purchaser  could  then  fill  out  the 
form  in  his  name  and  take  the  certificate  to  the  office 
of  the  company  and  surrender  it  for  a  new  certificate 
in  his  name. 

When  an  old  certificate  is  taken  up  it  should  be 
cancelled  by  the  secretary,  by  perforating  it  and  writ- 

5  P— 7 


98  CORPORATIONS. 

ing  "Cancelled"  across  it.  This  old  certificate  should 
then  be  pasted  on  the  underside  of  the  stub  to  which  it 
was  originally  attached.  It  should  never  be  reissued. 
The  secretary  or  transfer  clerk  should  assure  him- 
self of  the  genuineness  of  the  signature  of  the  trans- 
feror. He  should  completely  fill  out  the  new  cer- 
tificate. He  should  have  the  assignee  sign  the  re- 
ceipt upon  the  stub,  where  possible.  He  should  not 
issue  a  new  certificate  except  upon  surrender  of  the 
old.  If  lost,  he  should  require  a  bond,  and  for  his 
complete  protection  should  in  case  of  lost  certificates 
act  only  upon  the  resolution  of  the  directors  authoriz- 
ing him  to  issue  a  duplicate. 

Sec.  68.  BY-LAWS  AND  REGULATIONS  RESTRICT- 
ING  TRANSFER.  No  by-law  may  be  made  restricting 
the  transfer  of  stock  without  the  consent  of  all  the 
stockholders.  But  stockholders  may  agree  among  them- 
selves that  transfer  of  stock  shall  be  subject  to  certain 
restrictions. 


The  stockholder  has  a  right  to  transfer  his  stock. 
Any  by-law  passed  to  take  from  him  this  right  is  un- 
reasonable and  void.  But  a  stockholder  may  agree 
that  he  will  not  sell  his  shares  for  a  certain  time  or 
will  first  offer  his  shares  to  other  stockholders  of  the 
corporation,  or  to  the  corporation. 

Sec.  69.  RIGHTS  OF  TRANSFEREE  OF  STOCK 
SOLD  WITHOUT  AUTHORITY.  If  a  holder  of  shares 
of  stock  places  the  certificate  In  the  hands  of  another, 
properly  indorsed  for  transfer,  a  purchaser  may  assume 
that  such  holder  has  authority  to  sell,  but  the  owner 


AMERICAN  COMMEBCIAL  LAW.  99 

of  a  certificate  cannot  be  deprived  of  his  rights 
through  another's  forgery,  where  he  has  done  nothing 
to  estop  him  to  set  up  the  forgery. 

A  party  who  owns  a  certificate  of  stock  ought  not 
to  place  it  in  the  power  of  another  to  dispose  of  it 
as  the  apparent  owner,  unless  he  is  fully  confident 
of  that  other's  honesty  or  carefulness,  or  his  financial 
responsibility.  For  it  is  held  by  most  courts  that  if 
one  deposits  with  another  a  certificate  of  stock  so 
endorsed  that  it  may  be  transferred  by  delivery,  he 
puts  it  in  that  other's  power  to  represent  himself  as 
the  owner  or  as  one  who  has  authority  to  sell.  Cer- 
tificates of  stock,  properly  endorsed  by  the  party  re- 
cited therein  as  the  owner,  often  pass  from  hand  to 
hand,  and  one  who  holds  such  a  certificate  has  docu- 
mentary evidence  of  his  title  to  the  stock,  or  at  least 
his  authority  to  sell  the  stock. 

If  it  is  necessary  for  one  who  secures  possession 
of  a  certificate  not  his  own  to  forge  the  name  of  the 
owner  upon  the  blank  on  the  back,  then  the  true 
owner  loses  nothing  and  the  purchaser  from  such 
forger  acquires  no  rights  except  against  the  forger. 
One  cannot  be  deprived  of  his  property  by  the  for- 
gery of  another  when  he  has  not  done  anything  which 
estops  him  to  set  up  the  forgery. 

If  a  forged  certificate  is  sold  to  an  innocent  pur- 
chaser for  value,  who  takes  it  to  the  office  of  the 
company  and  has  a  new  certificate  issued  in  its  stead, 
the  holder  of  the  new  certificate  is  not  thereby  made 
a  stockholder  and  has  no  rights  against  the  corpo- 
ration, for  he  has  acted  upon  no  representations 
made  by  the  corporation.  But  if  such  new  certifi- 
cate is  sold,  the  purchaser  thereof  acquires  rights 


100  COBPOEATIONS. 

against  the  corporation,  for  he  has  acted  upon  the 
representations  made  in  this  certificate  by  the  cor- 
poration that  the  party  from  whom  he  purchased 
was  the  owner  of  shares  and  he  may  compel  the 
company  to  recognize  him  as  a  stockholder  if  it  has 
shares  or  may  acquire  them  to  issue  to  him ;  but  if 
it  does  not  have  and  can  not  acquire  such  shares  it 
is  then  liable  to  him  for  his  damages.  But  the  shares 
of  the  original  owner  whose  name  was  forged  can 
not  be  claimed  by  the  party  damaged. 

Thus,  let  us  suppose  that  A.  owns  a  share  of  stock 
in  the  M.  corporation,  and  possesses  Certificate  No. 
50  made  out  in  his  name,  as  evidence  of  that  fact. 
He  places  it  in  the  hands  of  B.  his  private  secretary, 
with  his  signature  to  the  blank  assignment  and  power 
of  attorney.  B.  represents  to  C.  that  A.  desires  to 
sell  the  stock  and  C.  acquires  the  certificate,  and  fills 
in  his  name  above  A.'s  signature.  Here  A.  is  estopped 
to  set  up  his  signature  against  C.  Suppose,  however, 
B.  had  forged  A.'s  name  to  the  blank  assignment. 
In  that  event  C.  could  take  no  right  superior  to  A.'s 
for  A.  has  done  nothing  to  estop  him  to  set  up  his 
forgery,  nb 

Sec.  70.  LIABILITIES  OF  TRANSFEREE  TO 
CORPORATION.  A  transferee  is  liable  for  unpaid  sub- 
scriptions unless  the  corporation  by  recitals  or  repre- 
sentations, on  which  the  transferee  relied,  that  the 
stock  was  paid,  is  estopped  to  claim  it  is  unpaid. 

The  general  rule  is  that  one  who  buys  stock  on 
which  the  subscription  is  not  called  is  liable  to  the  cor- 
poration for' the  unpaid  subscription;  but  if  the  cer- 
tificate recites  that  the  stock  is  paid,  a  purchaser 

lib.    Chicago  Edison  Co.  v.  Fay,  164  111.  323. 


[&MEBICAN  COMMEBOIAL  LAW.  101 

in  good  faith  can  rely  upon  that  recital,  as  against 
the  corporation.  One  of  the  purposes  of  such  recital 
is  to  aid  transfer,  and  the  corporation  cannot  deny 
such  recital  upon  which  the  purchaser  relies.  So  if 
the  certificate  recites  that  all  stock  is  non-assessable, 
that  is  binding  on  the  corporation. 

Sec.  71.  LIABILITY  OF  TRANSFEREE  TO  CRED- 
ITORS OF  THE  CORPORATION.  A  transferee  of  stock 
is  liable  for  the  benefit  of  creditors  of  the  corporation 
for  the  unpaid  amount  if  he  has  knowledge  that  the 
stock  la  unpaid. 

If  a  corporation  becomes  insolvent,  one  of  its  as- 
sets is  the  amount  due  on  unpaid  subscriptions.  Are 
purchasers  of  stock  from  the  subscriber  liable  at  the 
suit  of  the  creditors  in  such  event?  If  when  they 
purchase  they  know  they  are  purchasing  unpaid 
stock,  even  though  it  is  recited  in  the  certificate  that 
it  is  paid,  they  are  liable  according  to  the  law  in 
many  states.  In  a  recent  Illinois  case  the  rule  is  laid 
down  that  an  assignee  of  stock  is  bound  to  know 
that  it  is  unpaid  if  from  the  circumstances,  a 
reasonable  man  would  have  concluded  the  stock 
had  never  been  paid  in,  as  for  instance  where  he 
purchases  stock  from  the  subscribers  to  a  highly  cap- 
italized concern  which  he  knows  to  have  no  tangible 
assets. 

The  recitals  in  the  certificate  that  the  stock  is  paid 
are  binding  upon  the  corporation,  but  not  upon  cred- 
itors of  the  corporation,  and  they  can  hold  the  holder 
of  such  certificate,  regardless  of  such  recital. 

If  stock  has  been  paid  in  property,  we  have  here- 
tofore noted  that  if  the  property  was  fraudulently 


102  CORPOBATIONB. 

valued,  or,  in  some  states,  overvalued  without  fraud, 
the  transaction  may,  on  the  insolvency  of  the  cor- 
poration, be  set  aside  and  the  subscriber  of  the  stock 
held  for  the  par  value  of  the  stock  so  far  as  neces- 
sary to  pay  the  debts  of  the  corporation.  The  as- 
signee of  such  subscriber  may  likewise  be  held  where 
he  purchased  with  real  or  constructive  knowledge  of 
the  circumstances. 

Thus  in  one  case  a  corporation  was  organized 
with  a  capital  stock  of  $1,000,000.  The  directors 
agreed  to  receive  and  did  receive  a  worthless  patent 
in  full  payment  for  the  stock  subscribed  by  and  is- 
sued to  one  Johnson  to  the  extent  of  $998,000.  John- 
son's certificate  read  that  this  stock  was  "fully  paid 
and  non-assessable."  He  transferred  his  stock  and 
assigned  his  certificate  to  one  Rutan.  Thereafter 
the  corporation  became  insolvent  and  an  attempt  was 
made  by  one  of  the  creditors  to  compel  Rutan  to  pay 
the  debt.  The  concern  never  had  any  tangible  as- 
sets, as  Rutan  knew.  The  court  held  him  responsi- 
ble for  the  corporate  indebtedness,  saying,  "It  there- 
fore appeared  to  have  a  paid  up  capital  of  $1,000,000 
in  money  or  property,  and  was  possessed  of  nothing 
but  the  interest  in  the  patent.  It  is  not  conceivable 
that  a  person  of  ordinary  intelligence  and  prudence, 
buying  shares  of  stock  in  such  a  corporation,  would 
not  become  advised  as  to  what  property  the  corpora- 
tion had."  » 

If  stock  is  bought  on  the  open  market,  the  circum- 
stances would  usually  be  such  that  there  was  no 
knowledge  of  fraudulent  over-valuation. 

12.    Garden  City  Sand  Co.  v.  Crematory  Co.,  205  111.  42. 


AMEBICAN  COMMEBCIAL  LAW.  103 

Sec.  72.    LIABILITY  OF  TRANSFEROR  TO  TRANS- 

FEREE.  The  transferor  of  shares  Impliedly  warrants 
that  the  stock  Is  genuine,  that  he  has  good  title,  unen- 
cumbered, and  with  right  to  transfer.  If  a  further 
warranty  Is  claimed  It  must  be  shown  to  have  been 
expressly  made. 

The  doctrine  of  caveat  emptor  applies  in  sales  of 
stock  beyond  a  few  implied  warranties,  which  are 
above  recited.  If  the  transferee  desires  further  pro- 
tection, he  must  exact  express  warranties.  These 
would  consist  of  any  statement  of  fact  made  prior 
to  or  during  the  sale  for  the  purpose  and  with  the 
effect  of  inducing  it,  whether  known  to  be  false  or 
not.  But  mere  predictions  and  opinions  do  not  con- 
stitute warranties.  The  vendor  of  stock  would  also 
be  liable  to  his  transferee  for  fraudulent  statements 
of  fact,  that  is,  statements  known  to  be  false.  The 
rules  discussed  concerning  fraud  in  subscriptions 
are  applicable  in  respect  to  sales  by  a  stockholder. 
Defense  could  be  made  and  rescission  granted  under 
the  same  circumstances. 


CHAPTER  11. 


DIVIDENDS. 

Sec.  73.  DEFINITION  AND  KINDS.  Dividends  are 
the  funds  or  the  property  set  aside  by  a  declaration  of 
directors  for  payment  to  stockholders  as  profits  earned 
upon  the  stock. 

A  corporation  is  organized  for  purposes  of  profit 
to  its  stockholders.  All  profit  is  ultimately  to  go  to 
them.  It  comes  to  them  by  way  of  dividends.  Stock- 
holders are  not  entitled  to  a  division  of  the  profits 
except  upon  a  declaration  of  a  dividend  out  of  such 
profits. 

Dividends  are  payable  out  of  profits.  It  is  im- 
proper to  declare  dividends  where  no  profits  have 
been  made,  and  illegal  where  the  corporation  is  in- 
solvent, and  in  such  case  they  may  be  recovered  back, 
for  their  payment  is  a  fraud  on  creditors. 

There  are  the  following  kinds  of  dividends :  First, 
the  ordinary  money  dividend,  which  is  declared  in 
the  vast  majority  of  instances.  Second,  a  script 
dividend,  which  is  a  dividend  of  certificates  usually 
issued  to  anticipate  the  conversion  of  property  now 
representing  profits  into  cash  at  a  later  date.  These 
certificates  set  forth  the  rights  of  the  holder.  Third, 
a  stock  dividend,  or  a  dividend  of  the  stock  of  the 
corporation,  virtually  representing  a  sale  of  unissued 
stock  in  return  for  the  accumulated  profits.  A  cor- 

(104) 


AMERICAN  COMMERCIAL  LAW.  105 

poration  would  of  course  have  to  have  unissued  stock 
which  it  could  issue  without  exceeding  its  capitaliza- 
tion in  order  to  declare  such  a  dividend. 

Sec.  74.  DECLARATION  OF  DIVIDENDS  WITHIN 
DISCRETION  OF  DIRECTORS.  The  declaration  of 
dividends  is  within  the  discretion  of  the  directors.  But 
If  there  is  a  palpable  or  fraudulent  abuse  of  such  dis- 
cretion a  court  may  compel  a  declaration. 

The  directors  have  a  wide  discretion  as  to  whether 
or  not  to  declare  dividends.  Even  though  profits 
have  been  made  still  a  court  of  equity  will  not  at 
the  instance  of  a  stockholder  compel  the  declaration 
of  a  dividend  unless  there  is  very  clear  evidence  that 
the  refusal  on  the  part  of  the  directors  is  in  bad 
faith.  To  hold  otherwise  would  be  to  give  to  the 
stockholders  the  power  through  court  action  to  de- 
clare dividends.  Yet,  after  all,  the  purpose  of  in- 
corporation is  to  yield  profit,  and  this  ultimate  pur- 
pose cannot  be  defeated  or  unduly  hindered.  The 
stockholders  are  the  real  owners  of  the  business  and 
the  directors  are  trustees  for  them,  and  therefore 
a  court  of  equity  in  a  proper  case  will  compel  the 
declaration  of  dividends. 

Sec.  75.  PAYMENT  OF  DIVIDENDS.  Dividends 
are  payable  at  the  time  and  place  stated  In  the  decla- 
ration. If  not  paid  In  accordance  with  the  declara- 
tion the  stockholder  may  sue  as  upon  a  debt  due  him. 

After  a  dividend  is  declared  it  becomes  a  debt 
maturing  at  the  time  stated  in  the  declaration.  If 
not  paid  at  that  time  the  stockholder  can  sue  as  upon 
any  other  debt.  The  declaration  may  state  the  place 


106  COBPOBATIONS. 

at  which  the  dividend  is  payable,  provided  it  is  not 
unreasonable  and  oppressive. 

Sec.  76.  WHO  ENTITLED  TO  DIVIDENDS.  Divi- 
dends are  payable  to  those  who  are  stockholders  at  the 
time  of  the  declaration.  A  transferee  of  stock  after 
the  declaration  of  the  dividend  has  no  right  to  an 
unpaid  dividend,  though  Its  time  of  payment  is  after 
the  transfer. 

If  a  declaration  of  a  dividend  is  made  in  January, 
payable  in  March,  and  in  February  a  stockholder 
transfers  his  stock,  is  his  transferee  entitled  to  the 
dividend?  It  is  settled  that  he  is  not.  The  divi- 
dend becomes  payable  to  the  stockholder  who  is  such 
at  ,the  time  of  declaration,  regardless  of  the  ques- 
tion who  shall  own  it  when  the  dividend  is  payable 
or  paid. 

Sec.  77.  DIVIDENDS  UPON  PREFERRED  STOCK. 
Dividends  must,  as  a  usual  rule,  be  declared  upon  pre- 
ferred stock  if  there  are  profits  for  the  current  year  out 
of  which  they  may  be  paid. 

The  idea  underlying  the  issuance  of  preferred 
stock  is  that  the  preferred  shareholder  shall  have  an 
investment  on  which  he  can  rely  for  regular  returns 
if  the  profits  permit.  Consequently  the  payment  of 
dividends  on  preferred  stock  is  not  so  largely  within 
the  discretion  of  the  directors  as  in  case  of  common 
stock.  Yet  undoubtedly  they  have  some  discretion. 
In  considering  whether  there  are  profits,  all  the  cur- 
rent expenses  and  indebtedness  of  the  corporation 
must  be  deducted,  and  an  item  for  depreciation 
should  be  included. 


PART  m. 

THE  DIRECTORS  AND  OFFICERS  OF  A  COR- 
PORATION. 


CHAPTER  10. 

DIRECTORS. 
A.     The  Function  and  Composition  of  the  Directorate. 

Sec.  78.  THE  DIRECTORATE  DEFINED.  The 
directorate  is  the  body  elected  by  the  stockholders  to 
govern  and  manage  the  affairs  of  the  corporation. 

We  have  seen  how  stock  passes  readily  from 
owner  to  owner  and  that  one  of  the  objects  of  incor- 
poration is  to  permit  the  free  transfer  of  shares ;  and 
furthermore  we  know  how  the  stock  of  a  corporation 
may  be  divided  among  many  owners  and  may  come 
into  the  hands  of  indiscreet,  perhaps  malicious  per- 
sons, and  for  these  and  other  reasons  it  becomes  de- 
sirable to  put  the  management  of  the  corporation 
into  the  hands  of  some  permanent  board  whose  mem- 
bers may  be  chosen  for  their  known  executive  and 
general  business  ability;  hence  it  has  become  a  uni- 
versal custom  to  elect  a  governing  committee  or 
board,  which  is  usually  called  a  board  of  directors  or 
sometimes,  board  of  managers. 

This  directorate  has  the  immediate  government 
of  the  corporation  in  its  hands.  It  is  a  council  to 

(107) 


108  COBPOBATIONS. 

which  is  given  the  conduct  of  affairs  while  the  stock- 
holders go  about  their  various  concerns.  It  is  elected 
by,  and  answerable  to,  and  the  representative  of, 
the  stockholders  who  are  the  real  owners.  Yet  by 
the  creation  of  this  board,  the  stockholders  deprive 
themselves  of  the  power  to  have  an  immediate  voice 
in  the  management  of  the  corporation. 

The  directors  must  act  as  a  board.  Their  power 
is  exercisable  in  their  collective  capacity ;  and  they 
must  attend  in  person.  They  cannot  delegate  their 
discretionary  duties.  It  is  not  necessary,  however, 
that  every  director  be  present,  for  a  majority  (un- 
less some  other  number  is  specially  provided)  con- 
stitutes a  quorum  for  the  transaction  of  business. 

See.  79.  QUALIFICATIONS  FOR  MEMBERSHIP  IN 
THE  BOARD.  The  director  must  usually  be  a  stock- 
holder. By  law  in  some  states  he  must  be  a  resident 
of  the  state.  The  by-laws  should  specifically  provide 
the  qualifications. 

By-laws  usually  provide  that  a  director  must  be  a 
stockholder.  If  there  is  no  statutory  prohibition, 
they  may  provide  that  he  need  not  be  a  stockholder 
and  this  is  sometimes,  but  not  usually,  done.  A 
provision  is  often  made  that  if  during  the  tenure  of 
his  office  he  ceases  to  be  a  stockholder,  it  shall 
amount  to  a  resignation  by  him. 

The  by-laws  should,  and  usually  do,  set  out  in  de- 
tail his  qualifications. 


AMERICAN  COMMERCIAL  LATT.  109 

Sec.  80.  ELECTION  OF  DIRECTORS.  Directors 
are  elected  by  the  stockholders  acting  In  person  or  by 
proxy  at  a  regular  stockholders'  meeting.  The  legality 
of  an  election  may  be  tested  In  the  courts. 

The  stockholders  in  meeting  assembled  elect  the 
directors.  They  may  vote  in  person  or  by  proxy  and 
may  cumulate  their  vote  as  heretofore  explained. 

Usually  there  is  an  election  of  directors  at  the 
annual  meeting.  The  terms  of  office  of  the  various 
directors  need  not  expire  contemporaneously.  Often 
the  board  of  directors  is  composed  of  directors  whose 
terms  of  office  expire  relatively  after  the  manner 
of  the  terms  of  the  United  States  Senators,  so  that 
the  board  is  never  completely  renewed  at  one  time. 
In  the  smaller  corporations  there  is  usually  no  need 
for  such  a  provision. 

If  an  election  of  directors  is  illegal,  recourse  may 
be  had  to  the  civil  courts  to  contest  it.  The  court  will 
in  this  way  prevent  usurpation  of  office  and  will  pro- 
tect the  rights  of  minority  stockholders. 

If  no  election  is  had  at  the  appointed  time  the 
offices  do  not  become  vacant,  but  those  in  office 
continue  to  hold.  This  is  indeed  usually  provided 
for  in  the  by-laws  which  state  that  such  directors 
shall  hold  office  "until  their  successors  have  been 
elected  and  qualified." 

Vacancies  occurring  by  resignation,  death  or  re- 
moval can  only  be  filled  by  the  stockholders, 
unless  the  by-laws  give  the  directors  power  to  fill 
vacancies. 


110  CORPORATIONS. 

See.  81.    RIGHT  TO  REMOVE  DIRECTOR  DURING 

TERM.  The  stockholders  may  remove  a  director  for 
serious  misbehavior  during  his  term.  This  right  is 
called  the  right  of  amotlon. 

Aside  from  the  provisions  of  statute  or  by-law 
there  is  a  right  in  the  stockholders  to  remove  any 
director  who  seriously  offends  against  the  law  of  the 
land  or  the  duties  of  his  office.  If  he  is  charged  with 
having  committed  a  crime  which  does  not  directly 
touch  and  concern  his  office,  he  cannot  be  removed 
except  he  has  been  found  guilty  in  a  court  of  law. 
If  the  charge  is  that  he  has  been  unfaithful  in  his 
official  duties,  he  is  entitled  to  a  regular  trial  by  the 
corporation,  to  know  beforehand  the  specific  charge 
against  him,  and  have  counsel  in  his  defense. 

B.     The  Responsibilities  and   Rights  of  the  Directors. 

Sec.  82.  THE  DIRECTOR'S  RESPONSIBILITY  TO 
THE  CORPORATION.  The  director  Is  liable  to  the 
corporation  for  any  damage  occasioned  by  his  partici- 
pation In  ultra  vires  acts,  his  culpable  negligence,  or 
purposeful  Injury  by  him. 

If  it  is  alleged  that  a  director  has  wrought  injury 
to  the  corporation,  is  he  responsible  in  damages? 
This  would  depend.  His  office  is  one  of  large  dis- 
cretion. Because  in  the  exercise  of  that  discretion 
he  has  done  something  that  another  person  feels 
that  he  would  not  have  done,  he  cannot  be  held 
responsible.  For  mere  timidity  in  entering  into  ven- 
tures where  it  is  now  thought  the  corporation  would 
have  made  a  profit  he  is  not  liable. 


AMEBICAN  COMMEBOIAL  LAW.  Ill 

If,  however,  he  has  been  palpably  negligent  in 
guarding  the  welfare  of  the  corporation  he  may  be 
liable  for  damages  directly  traceable  to  such  negli- 
gence. So  in  cases,  if  he  acts  as  no  prudent  man 
would  have  acted  and  thereby  brings  disaster  upon 
the  corporation  he  is  liable.  In  a  New  York  case, 
directors  of  a  savings  bank  were  held  responsible 
because  they  had  erected  a  large  costly  office  build- 
ing when  the  bank  was  in  a  failing  condition,  al- 
though it  was  admitted  they  had  had  the  good  of 
the  corporation  in  mind  in  such  action.13  Directors 
must  use  a  fair  degree  of  prudence. 

A  fortiori  if  a  director  maliciously  injures  a  cor- 
poration he  is  liable. 

So  if  he  commits  any  ultra  vires  act,  knowing  it  to 
be  ultra  vires,  or  even  if  as  a  reasonably  prudent 
man  he  should  have  known,  he  is  responsible.  As 
where,  for  instance,  he  makes  the  corporation  liable 
on  an  accommodation  paper  executed  to  oblige  a 
friend  and  which  has  now  come  into  the  hands  of 
an  innocent  purchaser. 

Sec.  83.  LIABILITY  OF  DIRECTOR  TO  THIRD 
PERSONS.  A  director  acting  as  such  may  become 
responsible  to  third  persons,  by  reason  of  making  false 
reports,  declaring  dividends  wrongfully,  etc. 

If  a  director  misuses  his  office  to  the  injury  of 
creditors  or  other  persons,  he  is  personally  liable 
for  the  damage  caused.  Thus  a  creditor  might  hold 
him  for  using  the  funds  out  of  which  debts  should 
be  paid,  for  other  purposes,  as  by  declaring  a  div- 

13.    Hun  T.  Gary,  85  N.  Y.  65. 


112  CORPORATIONS. 

idend  when  the  corporation  is  insolvent.  Or  if  h* 
makes  false  reports  to  give  the  corporation  a  stand- 
ing it  is  not  entitled  to  and  to  secure  credit  the 
corporation  could  not  otherwise  have  obtained,  a 
creditor  who  was  meant  to  act  on  such  report  and 
who  did  act  upon  it,  could  hold  him  personally. 

By  statute  in  various  states  it  is  set  out  how  a 
director  may  become  liable  in  different  ways  to  a 
corporation. 

Sec.  84.  RIGHT  OF  DIRECTORS  TO  PROFIT  BY 
THE  RELATIONSHIP.  The  directors  occupy  a  relation 
of  strictest  trust,  and  cannot  use  the  position  for  pur- 
ooses  of  secret  profit,  or  to  enter  into  unfair  contracts, 
and  any  contract  made  with  a  director,  whether  fair  or 
not,  secured  by  his  own  vote  or  unfair  Influence  Is 
voidable.  A  director  cannot  vote  himself  a  salary. 

A  director  is  in  a  position  of  trust.  He  occupies 
the  office  by  virtue  of  a  confidence  reposed  in  him 
that  as  a  representative  he  will  guard  the  interests 
of  those  whom  he  represents.  He  cannot  use  the 
position  for  purposes  of  secret  profit  for  that  is  not 
the  purpose  for  which  he  was  placed  there.  Ac- 
cordingly he  cannot  sell  to  himself  or  buy  of  him- 
self, vote  himself  a  salary,  make  a  commission,  or 
in  any  other  way  oppose  his  interests  to  those  of  the 
corporation  except  upon  full  consent  of  all  the  stock- 
holders. If  he  contracts  with  the  corporation  and 
his  own  vote  was  necessary  to  secure  the  contract, 
it  is  voidable  at  the  suit  of  non-assenting  stockhold- 
ers, regardless  of  whether  it  was  fair  or  not.  If  the 
vote  of  the  director  was  not  necessary,  then  he  may 
make  a  binding  contract  with  the  corporation  as  to 
sell  to  it,  buy  from  it,  loan  it  money,  etc.  Yet  even 


AMERICAN  COMMERCIAL  LAW,  113 

in  that  case  the  contract  must  be  fair.  If  not  fair 
it  may  be  avoided  at  the  suit  of  dissenting  stock- 
holders provided  they  act  with  reasonable  prompt- 
ness. 

Directors  are  not  entitled  to  a  salary  in  the  absence 
of  an  express  agreement  by  the  corporation  with 
them  to  that  end.  And  directors  have  no  power  to 
take  the  profits  of  the  corporation  by  way  of  sala- 
ries to  them  by  their  own  vote.  As  a  matter  of  fact 
directors  often  serve  without  salaries,  but  sometimes 
are  allowed  a  per  diem  for  attendance  at  meetings, 
etc. 

C.      Powers  of  Directorate. 

Sec.  85.  VARIOUS  POWERS  OF  DIRECTORATE 
CONSIDERED.  The  directorate  has  the  power  to  do 
all  those  things  incidental  to  the  management  of  the 
corporation,  employing  the  agents,  selling  or  mort- 
gaging the  property,  issuing  negotiable  paper,  etc. 

As  the  directors  constitute  the  board  of  managers, 
they  have  as  a  board  very  broad  powers  and  can 
do  everything  that  falls  within  the  regular  manage- 
ment of  the  corporation.  They  can  determine  the 
policies  of  the  company,  proceeding  cautiously  or 
more  boldly,  as  their  judgment  dictates,  retrenching 
here  and  extending  there,  and  doing  all  things  that 
properly  fall  within  the  management  of  the  business. 
They  cannot  change  the  objects  of  the  corporation, 
increase  or  decrease  its  capital  stock,  or  carry  on 
acts  outside  the  scope  of  the  corporate  charter.  But 
as  long  as  they  keep  within  the  bounds  provided 
by  the  charter  they  may  do  practically  whatever  the 
corporation  may  do. 

•  B— 8 


114  COBPORATIONS. 

Thus,  they  may  borrow  money  for  ordinary  cor- 
porate purposes,  and  may  authorize  the  issue  of 
negotiable  paper  and  the  execution  of  mortgages  up- 
on the  property  of  the  corporation.  They  may  hire 
the  agents  and  officers  to  conduct  the  company's  bus- 
iness, and  fix  the  salaries  of  such  agents  and  officers. 
They  may  sell  the  corporate  real  estate,  buy  real 
estate,  and  execute  leases.  They  may  make  an  as- 
signment for  the  benefit  of  creditors  when  the  cor- 
poration becomes  insolvent. 

Here  are  a  few  things  they  may  not  do:  At  the 
common  law,  and  now,  in  some  of  the  states,  they 
cannot  make  the  by-laws  (but  in  some  states  this 
has  been  conferred  on  the  directors)  ;  they  have  no 
power  to  release  stock  liability  incurred  by  subscrip- 
tion ;  they  have  no  power  to  sell  out  the  business,  or 
sell  out  all  the  property  of  the  corporation  for  the 
purpose  of  stopping  the  business;  and  they  have  no 
power  to  do  anything  which  is  ultra  vires. 


D.     Directors'  Meetings. 

Sec.  86.  IN  GENERAL.  Directors  must  act  In  meet- 
Ings.  These  may  be  fixed  to  occur  regularly,  as  once 
a  month,  or  they  be  held  at  special  Intervals. 

Directors  hold  regular  and  special  meetings.  Or- 
dinarily their  regular  meetings  occur  at  more  fre- 
quent intervals  than  those  of  stockholders.  There 
is  an  annual  meeting  for  the  election  of  officers,  and 
this  usually  follows  immediately  after  the  annual 
stockholders'  meeting  at  whicH  the  directors  or  some 
of  them  have  been  elected.  Then  the  by-laws  pro- 
vide in  most  instances  for  monthly  meetings.  When 


AMERICAN  COMMEBCIAL  LAW.  115 

there  is  no  business  to  be  performed  by  the  direc- 
tors, they  may  not  come  together  at  such  monthly 
meetings,  and  the  secretary  should  then  simply  enter 
upon  the  minutes  that  there  being  no  quorum  pres- 
ent, the  meeting  stood  adjourned. 

The  by-laws  usually  provide  that  the  meetings  are 
to  be  held  at  a  certain  time  or  place.  This  time  and 
place  cannot  be  unreasonable. 

The  directors  must  act  as  a  board,  and  thus  their 
meetings  are  highly  important.  Any  action  taken 
by  the  directors,  as  such,  without  calling  a  meeting 
is  invalid,  but  it  may  be  ratified  at  subsequent  meet- 
ings and  thus  the  defect  be  cured. 

Special  meetings  may  be  called  as  provided  in  the 
by-laws,  or  if  there  is  no  provision  then  by  the  presi- 
dent, or  they  may  be  held  by  common  consent  of  the 
directors  themselves. 

A  majority  of  the  directors  present  constitute  a 
quorum  unless  it  is  otherwise  provided. 

Much  that  has  been  said  in  reference  to  the  man- 
ner of  conducting  stockholders'  meetings,  the  legal 
value  of  the  minutes,  etc.,  is  applicable  here  and 
need  not  be  repeated. 

Sec.  87.  METHOD  OF  TRANSACTING  BUSINESS 
AT  DIRECTORS'  MEETING.  The  directors  transact 
business  by  voting  and  passing  resolutions.  Any  order 
of  business  may  be  adopted  which  Is  found  convenient. 

The  motions  and  resolutions,  carried  by  majority 
vote,  constitute  the  business  done  by  the  directors. 
A  quorum  must  be  present,  else  there  cannot  be  any 
business  performed.  If  such  quorum  is  present,  a 
majority  can  carry  motions.  When  stockholders 
vote,  one  stockholder  may  be  able  to  carry  a  vote 


lid  CORPORATIONS. 

against  many  stockholders  because  he  owns  more 
stock  and  his  voting  power  is  determined  by  his 
ownership  of  stock.  But  directors  vote  as  man  and 
man.  Each  director,  no  matter  what  his  ownership 
of  stock,  or  whether  he  owns  any  stock,  has  as  much 
power  as  any  other  director.  Directors  are  elected 
on  their  reputation  for  discretion,  business  acumen 
and  similar  qualities. 

The  by-laws  may  set  forth  the  order  of  business, 
but  even  then  such  a  provision  is  more  advisory  than 
mandatory.  The  directors  may  consult  their  own 
convenience  in  transacting  the  business  of  the  meet- 
ing. 

Sec.  88.  MINUTES.  The  secretary  should  make 
full  and  correct  minutes  of  the  meeting.  These  be- 
come the  evidence  of  what  Is  transacted. 

The  secretary  of  the  corporation  should  attend 
and  should  carefully  and  regularly  keep  the  minutes. 
A  form  of  minutes  is  set  out  in  the  Appendix. 


CHAPTER  13. 


THE  ADMINISTRATIVE  OFFICERS  OF  THE  CORPORATION. 

Sec.  89.  INTRODUCTORY.  The  ordinary  executive 
officers  of  the  corporation  are  the  president,  one  or 
more  vice-presidents,  a  secretary  and  treasurer.  Offi- 
cers are  elected  by  the  director*. 

An  executive  officer  of  a  corporation  is  a  person 
who  is  elected  by  the  directors  to  preside  over  and 
administer  the  affairs  of  the  corporation,  or  some  de- 
partment thereof,  under  the  general  supervision  of 
the  directors.  There  are  certain  officers  which  we 
expect  every  corporation  to  have :  The  president  of 
the  board  of  directors,  vice-president,  secretary,  and 
treasurer.  Besides  these  executive  officers  there  may 
be  other  officers  in  any  particular  corporation,  as, 
for  instance,  that  of  chairman  of  the  board,  or  of 
general  manager,  or  auditor.  In  addition  to  these 
offices,  there  may  be,  of  course,  many  positions  of 
more  or  less  importance,  some  of  which  are  a  sort 
of  a  division  of  an  office  and  the  duties  attaching 
to  them  are  ministerial  rather  than  of  a  discretion- 
ary or  executive  nature.  Thus,  we  have  transfer 
clerks,  general  sales  agents,  accountants,  bookkeep- 
ers, stenographers,  etc. 

The  officers  are  elected  by  the  directors.  Usually 
they  are  elected  to  serve  for  a  certain  time,  as,  one 
year. 

(117) 


118  CORPORATIONS. 

We  will  now  consider  in  some  detail  the  duties  of 
the  usual  officers. 

Sec.  90.  THE  PRESIDENT.  The  president  Is 
elected  by  the  directors  and  his  duty  is  to  preside  at 
meetings  of  the  directors  and  to  pursue  such  other 
activities  as  are  prescribed  for  him  In  a  particular 
case. 

The  duty  of  the  president  is  to  preside  at  the  meet- 
ing of  the  directors,  and  to  perform  the  duties  that 
are  imposed  on  him  by  the  by-laws  or  otherwise. 
He  is  often  given  the  power  of  a  general  manager 
of  the  corporation.  As  such  general  manager,  he 
would  have  quite  broad  implied  powers,  namely,  all 
of  those  powers  which  we  would  expect  to  find,  be- 
cause we  customarily  do  find  them,  in  the  general 
manager  of  such  a  business.  The  president  may 
usually  employ  the  agents  and  servants  of  the  cor- 
poration and  in  general  oversee  the  carrying  on  of 
its  regular  business.  He  cannot,  of  course,  bind 
the  corporation  upon  any  contract  which  the  cor- 
poration has  no  power  to  make,  and  if  any  unusual 
contract  is  to  be  made  by  him,  such  as  the  purchase 
of  land,  special  authority  empowering  him  should 
be  sought.  The  notes  of  a  corporation  are  usually 
signed  by  its  president  in  the  absence  of  stipulations 
to  the  contrary. 

The  duties  and  powers  of  the  president  ought  to 
be  set  out  at  some  length  in  the  by-laws,  yet  in  any 
case  parties  dealing  with  the  president  upon  some 
ordinary  corporate  matter  are  concerned  rather  with 
the  apparent  authority  of  the  president,  than  that 
stated  in  the  by-laws.  As  in  the  case  of  any  general 
agent,  he  might  seem  from  his  position  to  have  quite 


AMERICAN  COMMEECIAL  LAW.  119 

larger  powers  than  those  formally  conferred  upon 
him. 

In  some  corporations  he  has  few  active  duties  to 
perform  and  his  position  carries  with  it  little  author- 
ity to  represent  the  corporation. 

Sec.  91.  THE  VICE-PRESIDENT.  The  vice-presi- 
dent Is  an  officer  elected  by  the  directors  for  the  pur- 
pose of  serving  in  the  place  of  the  president  when  that 
official  is  absent,  and  he  Is  often  given  many  other 
duties. 

The  powers  of  a  vice-president  must  be  sought  in 
any  particular  case.  He  must  preside  at  meetings 
of  the  directors  where  the  president  is  absent;  but 
what  his  particular  powers  shall  be  beyond  this  de- 
pends upon  the  facts  in  each  case.  Sometimes  there 
are  in  large  corporations  a  number  of  vice-presidents, 
to  each  one  of  whom  is  assigned  some  particular  line 
of  work.  Very  often  the  position  is  simply  hon- 
orary. 

Sec.  92.  THE  SECRETARY.  The  secretary  Is  the 
officer  elected  by  the  directors  to  record  the  minutes 
and  keep  the  books  of  the  company  and  to  carry  on 
ordinary  secretarial  duties. 

The  secretary  must  keep  the  books  of  the  corpo- 
ration containing  the  list  of  the  stockholders,  the 
minutes  of  the  various  meetings  and  so  on,  and  usu- 
ally also  has  charge  of  the  seal  of  the  corporation 
and  affixes  it  to  the  contracts  and  attests  the  signa- 
ture of  the  president.  He  has  no  implied  power  to 
bind  the  corporation  by  contract  except  as  the  cir- 


120  COBPORATIONS. 

cumstances  In  each  particular  case  may  give  him 
such  implied  power. 

The  secretary  must  sec  to  it  that  the  various  no- 
tices are  given,  the  reports  to  the  states  made,  etc. 
For  this  reason  he  should  keep  before  him  a  list  or 
calendar  of  things  to  be  done.  He  should  never  de- 
pend upon  his  memory.  By  making  up  a  calendar  of 
this  sort  and  keeping  it  before  him  daily,  it  becomes 
sure  that  he  will  overlook  nothing.  The  duties  of 
the  secretary  in  respect  to  the  transfer  of  stock, 
keeping  the  minutes,  etc.,  are  treated  under  those 
headings. 

Sec.  93.  THE  TREASURER.  The  treasurer  Is  an 
officer  elected  by  the  directors  to  take  charge  of  the 
funds  of  the  corporation  and  keep  Its  fiscal  accounts. 

The  treasurer  of  the  corporation  has  the  right  to 
receive  the  funds  payable  to  it,  must  keep  account 
of  those  funds  and  must  in  general  perform  all  of 
those  duties  which  are  ordinarily  given  to  such  an 
officer  in  any  organization,  corporate  or  otherwise. 
See  the  provisions  in  the  by-laws  in  the  Appendix. 

Sec.  94.  IN  GENERAL.  The  above  statements  are 
very  general  In  nature  and  the  powers  of  any  particular 
officer  must  be  sought  from  the  by-laws,  the  customs 
and  all  the  facts  In  each  particular  Instance. 

The  powers  of  any  officer  of  a  corporation  are 
very  largely  governed  by  the  particular  facts  in  each 
case.  Thus,  the  president  of  one  corporation  might 
have  much  broader  powers  than  the  president  of 
another  corporation  from  the  fact  that  such  pow- 
ers had  been  granted  him  by  by-law  or  from  the 
fact  that  he  had  been  invested  with  apparent  au- 


AMERICAN  COMMERCIAL  LAW.  121 

thority  by  the  corporation  to  make  particular  con- 
tracts or  to  pursue  a  certain  line  of  conduct.  An 
agent,  as  we  know,  is  presumed  to  have  all  of  the 
authority  which  anyone  acting  under  those  same  cir- 
cumstances would  be  presumed  by  a  reasonable  man 
to  have.  It  is  true  that  he  cannot  have  greater  pow- 
ers than  the  corporation  could  exercise  under  its 
charter.  It  is  also  true  that  if  any  particular  or 
unusual  acts  are  to  be  performed,  there  would  not 
be  any  implied  authority  on  his  part  to  perform 
them,  but  the  particular  authority  should  be  sought 
by  the  person  acting  with  such  officer.  The  pow- 
ers of  any  officer  of  a  corporation  are  governed 
largely  by  the  usual  rules  of  agency. 

Sec.  95.  EXECUTION  OF  CONTRACTS  BY  OFFI- 
CERS OF  CORPORATION.  The  officers  of  a  corpora- 
tion should  execute  its  contracts  In  the  corporate  name 
signed  by  them  as  officers.  The  seal  should  be  affixed  on 
all  papers  when  required  by  the  by-laws,  or  of  solemn 
Import,  and  on  those  contracts  upon  which  whether 
executed  by  a  corporation  or  a  natural  person  the  law 
requires  a  seal. 

It  is  a  rule  of  the  law  of  agency  that  an  agent  to 
bind  his  principal  and  not  to  bind  himself  must  con- 
tract in  his  principal's  name.  An  officer  of  a  corpora.- 
tion  must  bear  this  rule  of  law  in  mind.  If  he  signs 
in  his  own  name  even  though  he  describes  himself 
after  his  signature  as  an  officer  he  will  bind  him- 
self. Thus  if  he  signs  his  name  "William  Smith, 
President  of  A.  B.  Co.,"  this  is  hardly  more  than 
saying,  "I  am  the  president  of  the  A.  B.  Company. 
I  want  to  get  some  supplies  for  the  corporation  and 
if  you  will  let  me  take  them  I  will  promise  to  pay 


122  COBPOKATIONS. 

for  them."    Rather  such  officer  should  sign  as  fol- 
lows: 

THE  A.  B.  COMPANY, 
By  William  Smith, 

President. 

It  is  not  necessary  to  state  the  officer's  name  in  the 
body  of  the  instrument.  That  is  usual  in  contracts 
made  by  other  principals  than  corporations,  and  in 
contracts  made  by  corporations  through  other  agents 
than  its  officers,  but  is  not  done  so  frequently  where 
an  officer  signs  a  contract,  because  the  corporation 
must  act  through  some  agent  and  that  agent  is  usu- 
ally an  officer. 

The  by-laws  sometimes  provide  how  particular 
contracts  shall  be  signed,  and  it  is  sometimes  stated 
that  contracts  must  be  attested  by  the  signature  of 
the  secretary  and  the  seal  of  the  corporation.  In 
such  a  case  the  signature  would  be  as  follows : 
Attest:  THE  A.  B.  COMPANY, 

[L.  S.]  By  William  Smith, 

JOHN  WILLIAMS,  Its  President. 

Secretary. 

The  old  law  used  to  be  that  a  corporation  spoke 
only  by  its  seal,  but  one  can  readily  see  that  such 
a  doctrine  must  of  necessity  be  departed  from  in 
these  days.  A  corporation  need  not  now  affix  a 
seal  unless  it  is  entering  into  a  contract  upon  which 
the  law  requires  a  seal  no  matter  who  executes  it. 
Such  contracts  (in  many  states)  are  deeds,  mort- 
gages, bonds  and  powers  of  attorney. 

The  by-laws  may  require  the  affixing  of  the 
seal  in  various  instances  besides  those  required  by 
law. 


AMERICAN  COMMERCIAL  LAW.  123 

The  use  of  the  seal  is  helpful  also  in  this  respect, 
that  it  raises  a  certain  presumption  as  to  the  authority 
of  the  officer  signing  the  contract,  and  accordingly 
it  is  usually  fixed  to  any  contract  of  an  important 
or  unusual  nature.  It  is  almost  invariably  placed  on 
stock  certificates. 

Where  instruments  are  drawn  up  in  a  formal  way, 
the  ending  is  usually  in  the  shape  of  a  "Testimonium 
Clause."  The  following  is  an  example  taken  from 
an  Illinois  mortgage  form: 

In  Testimony  Whereof,  The  said  Mortgagor  hath  hereunto 
caused  it*  corporate  seal  to  be  affixed,  and  these  presents 

to  be  signed  bj  ita President,  and  attested 

by  its  Secretary,  this  

day  of  in  the  year  of  our  Lord  nineteen 

hundred  and  twelve. 


( Corporate  By 

Seal)  Its  President 

Attest:   

Secretary. 

In  instruments  of  informal  kind,  the  signature  is 
also  informal. 

Notes,  checks,  etc.,  have  no  testimonium  clause. 


PART  IV. 

CREDITORS  OF  A  CORPORATION. 

CHAPTER  14. 

CORPORATE   BONDS  AND   MORTGAGES. 

Sec.  96.  POWER  OF  CORPORATION  TO  ISSUE 
BONDS  AND  MORTGAGES.  A  private  business  cor- 
poration has  implied  power  to  borrow  money  and  to 
that  end  may  Issue  bonds  to  evidence  the  Indebtedness 
and  execute  mortgages  to  secure  It. 

A  corporation  has  the  implied  power  to  borrow 
the  necessay  funds  to  finance  its  legitimate  projects. 
This  power  to  borrow  money  includes  the  power  to 
use  those  means  whereby  the  borrowing  may  be  ac- 
complished, that  is  to  say,  the  power  to  issue  prom- 
issory notes,  or  bonds,  whereby  its  obligation  may 
be  evidenced,  and  the  power  to  execute  mortgages 
upon  its  real  or  personal  property  whereby  the  obli- 
gation is  supported.  When  a  public  or  quasi  public 
or  municipal  corporation  issues  bonds  and  mort- 

fages,  other  questions  may  arise,  for  usually,  either 
y  a  general  statute  or  by  the  particular  charter,  the 
authority  must  in  such  case  be  specially  conferred. 
But  a  private  corporation  has  this  power  by  impli- 
cation. 

(124) 


AMERICAN  COMMEBCIAL  LAW.  125 

Sec.  97.    NEGOTIABILITY  OF  CORPORATE  BONDS. 

If  corporate  bonds  are  drawn  so  as  to  contain  all  the 
requisites  of  negotiable  paper,  they  are  in  effect  prom- 
issory notes  with  the  property  of  negotiability. 

A  bond  in  ordinary  form  is  a  promise  of  the  cor- 
poration to  pay  at  some  future  time  a  certain  sum 
of  money.  It  is  an  evidence  of  an  indebtedness  and 
a  definite  promise  to  pay  the  indebtedness.  Nego- 
tiable instruments  must  contain  certain  elements 
such  as  certainty  of  sum  payable,  certainty  of  the 
time  of  payment,  words  of  negotiability,  etc.,  and 
there  must  not  be  any  conditional  stipulations.  If 
a  bond  of  a  corporation  is  drawn  in  such  form,  it 
is  negotiable.  It  is  in  reality  a  promissory  note,  but 
it  differs  from  the  ordinary  form  in  that  it  is  a  part 
of  a  series,  the  units  of  which  may  be  held  by  va- 
rious parties,  the  whole  series  being  secured  by  a 
mortgage  upon  the  property  of  the  corporation. 

As  bonds  may  be  negotiable,  an  innocent  pur- 
chaser for  value  takes  the  same  sort  of  title  to  them 
which  he  would  have  in  the  case  of  the  purchase 
of  any  negotiable  paper.  He  must,  however,  take 
notice  of  the  recitals  in  the  bond.  If  he  knows  that 
the  issue  was  fraudulent,  or  an  over  issue,  or  any 
other  fact  that  would  nullify  the  issue,  he  gets  a 
defective  title. 

Sec.  98.  FORM  OF  BONDS.  Bonds  are  Issued  In 
two  general  forms,  (a)  registered  bonds  and  (b)  un- 
registered or  coupon  bonds. 

A  coupon  bond  is  a  bond  payable  to  bearer,  or  to 
some  one  or  his  order,  and  has  attached  to  it,  inter- 
est coupons  for  the  installments  of  interest  as  the 


126  COBPOBATIONS. 

installments  fall  due.  These  coupons  may  be  clipped 
off  and  sold  separately  as  promissory  notes.  Coupon 
bonds  are  transferable  by  mere  delivery  and  are 
intended  to  be  negotiable.  A  registered  bond  is  a 
bond  transferable  only  by  registering  the  name  of 
the  transferee  on  the  books  of  the  corporation,  and 
its  negotiability  is  temporarily  withdrawn,  as  it  is 
not  payable  to  any  one's  order  or  to  bearer. 

The  bond  usually  recites  that  it  is  one  of  an  is- 
sue of  a  series  of  bonds  numbered  consecutively 
from  some  number  to  another,  sets  forth  the  denom- 
ination, amount  of  issue,  security,  etc.  It  refers  to 
and  describes  the  trust  deed  or  mortgage. 

Sto.  99.  THE  BOND  SECURITY.  The  bond  Is  usually 
secured  by  a  mortgage  upon  the  property  of  the  cor- 
poration, which  is  usually  in  the  form  of  a  trust  deed 
naming  one  or  several  trustees  who  hold  the  title  for 
the  benefit  of  the  bondholders. 

The  bondholders  of  a  corporation  usually  have 
their  security  by  way  of  mortgage.  This  mortgage  is 
in  form  a  trust  deed,  that  is  to  say  a  deed  to  a  trustee, 
who  shall  hold  upon  the  trusts  stated  in  the  deed.  It 
is  this  security  which  makes  the  bond  salable  and 
each  succeeding  bondholder  is  safe  if  the  security  is 
ample. 

6ec.  100.  REMEDIES  OF  BONDHOLDERS.  A 
holder  ef  a  bond  or  bond  coupon  which  has  fallen  due 
can  sue  at  law  and  obtain  a  judgment,  or  if  there  Is 
default  in  the  provision  of  the  mortgage,  the  trustee 
can  foreclose  for  the  benefit  of  the  bondholders. 

A  bondholder  ma>  sue  in  the  court  of  law  and  ob- 
tain judgment  as  upon  any  other  obligation  which 


AMEBICAN  COMMERCIAL  LAW.  127 

has  fallen  due.  He  can  not  levy  upon  the  property 
covered  by  the  trust  deed,  but  may  levy  on  any 
other  property  belonging  to  the  corporation. 

The  trustee  may  upon  default  bring  an  action  to 
foreclose  for  the  benefit  of  the  bondholders.  In  such 
a  case  the  property  would  probably  be  placed  in 
the  hands  of  a  receiver. 

See.  101.  OTHER  INDEBTEDNESS  OF  A  CORPO- 
RATION. A  corporation  may  Issue  and  become  liable 
oh  negotiable  paper,  secure  the  same  by  mortgage  and 
have  Indebtedness  after  the  manner  of  a  natural  person. 
Its  property  Is  subject  to  execution. 

Assuming  in  a  general  way  that  a  corporation  is 
acting  in  the  exercise  of  its  charter  activities,  it  may 
accomplish  its  results  by  issuing  or  endorsing  notes, 
bills  of  exchange  or  other  evidences  of  indebtedness ; 
may  accept  bills  of  exchange;  execute  chattel  and 
real  estate  mortgages;  become  indebted  on  open  ac- 
count; be  subect  to  levy  under  execution  or  attach- 
ment; have  its  mortgages  foreclosed;  be  made  a 
bankrupt;  and  in  general  is  subject  to  the  same  con- 
siderations in  these  respects  as  a  natural  person. 


CHAPTER  15. 


INSOLVENT  CORPORATIONS.14 

Sec.  102.  DEFINITION.  We  may  for  our  purposes 
define  an  insolvent  corporation  as  one  whose  assets  are 
insufficient  to  pay  its  liabilities,  and  which  for  that 
reason  cannot  meet  its  current  expenses  and  matur- 
ing debts. 

We  are  to  consider  in  this  chapter  the  rights  of 
creditors  of  a  corporation  which  is  failing  and  can- 
not meet  its  financial  obligations. 

Sec.  103.  THE  TRUST  FUND  DOCTRINE.  The 
property  of  an  Insolvent  corporation  is  regarded  as 
being  held  in  trust  for  its  creditors,  but  aside  from  the 
fact  that  creditors  are  always  to  be  satisfied  before 
the  shareholders  are  entitled  to  a  division  of  the  assets 
the  application  of  the  doctrine  is  not  entirely  uniform. 

There  is  a  doctrine  in  corporation  law,  known  as 
the  "trust  fund  doctrine."  Some  courts  are  in- 
clined to  limit  the  application  of  the  doctrine  while 
others  give  it  an  extensive  application.  All  the  courts 
are  agreed  that  the  stockholders  have  no  right  to 
a  division  of  the  assets  until  creditors  have  been 
paid,  whether  such  creditors  have  or  not  any  secur- 
ity or  lien.  If  one  is  a  creditor  he  is  entitled  to  his 

14.    In  connection  with  this  chapter  see  chapter  7. 

(128) 


AMEBICAN  OOMMEBCIAL  LAW.  129 

rights  as  creditor,  though  he  may  be  a  stockholder 
or  director. 

This  trust  fund  doctrine  prevents  a  corporation 
from  releasing  subscribers,  compromising  with  them, 
paying  back  to  them  their  subscriptions,  paying,  div- 
idends when  insolvent,  issuing  stock  at  less  than 
par,  etc.,  for  in  all  of  these  issues  the  creditor  is 
deprived  of  assets  to  which  he  should  have  access. 

Sec.  104.  RIGHT  OF  INSOLVENT  CORPORATION 
TO  PREFER  CREDITORS.  In  many  states,  it  is  allow- 
able for  a  corporation  to  prefer  one  creditor  over 
another,  and  this  preferred  creditor  may  in  some  states, 
be  also  a  stockholder,  but  not  a  director.  But  a  pref- 
erence of  any  creditor  is  an  act  of  bankruptcy  and 
usually  avoidable  by  proceeding  in  apt  time. 

By  the  principles  of  the  common  law  it  was  per- 
fectly legal  for  an  insolvent  debtor  to  prefer  one 
general  creditor  over  another.  If  A.'s  assets  are 
$1,000  and  he  owes  B.,  C.  and  D.  each  $1,000,  none 
of  whom  has  any  security  or  lien,  he  may  pay  $1,000 
to  B.,  and  C.  and  D.  can  not  complain.  They  must 
wait  until  he  acquires  other  assets.  This  applies  to 
a  corporation.  But  the  question  arises:  suppose  the 
preferred  creditor  is  a  stockholder  ?  On  principle, 
a  preference  should  not  be  allowed,  because  the  stock- 
holders of  a  corporation  are  the  real  owners  of  a 
business,  and  a  preference  to  a  stockholder  is  in 
reality  a  preference  by  one  to  himself.  But  the  fic- 
tion of  the  law  that  a  corporation  is  a  separate  en- 
tity has  often  had  results  which  while  theoretically 
logical,  are  actually  unjust.  Some  states  allow  a 
debtor  to  be  preferred  where  he  is  also  a  stockholder. 

•  B-9 


130  COBPOBATIONS. 

But  almost  everywhere,  a  director  cannot  be  pre- 
ferred. 

By  our  National  Bankruptcy  Law,  preferences  are 
acts  of  bankruptcy,  that  is,  they  are  acts  which  give 
creditors  grounds  upon  which  to  base  a  petition  in 
bankruptcy,  provided  the  debtor  is  proceeded  against 
within  four  months  from  the  time  that  the  prefer- 
ence was  given.  Insolvency  is  a  necessary  element 
to  this  act  of  bankruptcy.  A  preference  may  also 
be  set  aside  by  the  trustee  in  bankruptcy  where  the 
creditor  to  whom  it  was  paid  knew  or  had  reason- 
able cause  to  know  that  preference  was  intended. 

Sec.  105.  RIGHT  OF  INSOLVENT  CORPORATION 
TO  MAKE  A  GENERAL  ASSIGNMENT.  A  corporation 
may  make  a  general  assignment  for  the  benefit  of  Its 
creditors.  But  any  dissenting  creditor  can  by  proceed- 
ing in  the  courts  of  bankruptcy  have  it  set  aside. 

A  corporation  has  power  to  make  a  general  as- 
signment of  its  assets  to  a  trustee  for  the  benefit  of 
all  its  creditors.  Our  National  Bankruptcy  Law 
makes  that,  however,  an  act  of  bankruptcy,  and  void- 
able by  any  dissenting  creditor. 

Sec.  106.  RIGHTS  OF  SECURED  AND  LIEN  CRED- 
ITORS. A  secured  and  lien  creditor  of  an  Insolvent 
corporation  Is  protected  to  the  extent  of  his  lien  and 
security,  except  that  some  liens  are  dissolved  by  bank- 
ruptcy. 

One  who  takes  security  for  his  debt  at  the  time 
of  its  inception  whether  from  an  individual  or  a 
corporation  is  safe  to  the  extent  of  the  value  of  that 
security.  It  is  immaterial  whether  or  not  the  debtor 


AMERICAN  COMMERCIAL  LAW.  131 

is  insolvent  even  though  insolvent  when  the  security 
is  taken.  The  same  may  be  said  of  one  who  ac- 
quires any  lien,  except  that  liens  which  are  acquired 
through  legal  proceedings  (as  a  lien  acquired  through 
attachment  or  judgment)  is  dissolved  by  bankruptcy 
proceedings  which  are  begun  not  later  than  four 
months  after  the  lien  is  acquired. 

Sec.  107.  WHAT  ARE  ASSETS  OF  THE  CORPORA- 
TION—STOCKHOLDERS' UNPAID  LIABILITY.  All 
species  of  property  Including  debts  owing  the  corpora- 
tlon  constitute  Its  assets  and  are  collectible  for  the 
benefit  of  the  creditors  In  a  proper  proceeding. 

The  creditors  of  a  corporation  may  collect  their 
debts  out  of  the  assets  of  whatsoever  nature,  whether 
tangible  or  intangible.  In  a  court  of  equity,  by 
creditor's  bill,  or  otherwise,  or  in  a  court  of  bank- 
ruptcy, the  creditors,  or  the  trustee  in  bankruptcy 
for  them,  may  proceed  to  the  collection  of  assets. 
Among  these  assets  are  the  claims  against  stock- 
holders on  their  subscriptions.  If  a  corporation  is 
organized  for  $25,000.00  and  this  is  all  subscribed 
but  only  in  part  paid  in,  that  which  is  not  paid  in 
may  be  collected  upon  the  insolvency  of  the  cor- 
poration for  distribution  among  the  creditors  to 
the  extent  to  which  it  is  necessary  to  pay  such  cred- 
itors. 

See.  108.  REMEDIES  OF  CREDITORS  OF  INSOL- 
VENT CORPORATION.  Creditors  of  an  Insolvent  cor- 
poration  may  file  a  petition  In  bankruptcy  against  It,  or 
proceed  in  the  state  court  under  state  statutes,  for  the 


132  COEPOBATIONS. 

appointment  of  a  receiver.     And  they  have  the  usual 
remedies  of  any  creditor  against  his  debtor. 

Aside  from  the  usual  remedies  which  a  creditor 
has  against  his  debtor  for  the  collection  of  the  debt, 
the  creditors  may  put  an  insolvent  corporation  into 
bankruptcy  whenever  it  commits  an  act  of  bank- 
ruptcy, and  also  under  state  statutes,  they  may  pro- 
ceed to  have  a  receiver  appointed  and  the  corpora- 
tion wound  up,  and  in  this  manner  they  secure  dis- 
tribution of  its  assets  among  them. 


PART  V. 

POWERS  OF  A  CORPORATION. 

CHAPTER  18. 

GENERAL    CONSIDERATION    OF    POWERS    OF   A    CORPORA- 
TION. 

Sec.  109.  POWERS  CLASSIFIED.  INHERENT 
POWERS.  Powers  of  a  corporation  may  be  classified  as 
those  powers  which  are  inherent  In  corporate  existence; 
express  charter  powers;  and  powers  Implied  from 
express  charter  powers. 

The  powers  inherent  in  corporate  existence  may 
be  set  up  as  follows:  i.  Power  to  have  a  name; 
2.  Power  to  have  a  seal ;  3.  Power  to  make  by-laws ; 
4.  Power  to  have  a  board  of  directors ;  5.  Power  to 
sue  and  be  sued ;  6.  Power  to  receive,  hold  and  grant. 
Every  corporation  has  the  above  powers  no  matter 
what  the  purpose  of  its  existence  may  be.  In  other 
words,  whether  it  is  a  corporation  organized  to  buy 
and  sell  drygoods  or  whether  it  is  a  corporation  for 
some  charitable  purpose,  it  would  have  these  pow- 
ers unless  in  some  particular  case  some  of  them 
had  been  denied.  That  is  to  say,  these  powers  are 
inherent  in  the  very  existence  of  a  corporation.  Be- 
sides these  powers  it  has  the  powers  which  are  ex- 
pressly conferred  in  the  particular  case  and  those 
powers  which  we  reasonably  imply  therefrom. 

(133) 


134  CORPOBATTONS. 

Sec.  110.  EXPRESS  CHARTER  POWERS.  A  cor- 
poratlon  has  all  the  powers  set  forth  In  Its  charter  or 
certificate  of  Incorporation  which  are  not  Illegal  or 
Inconsistent  with  the  public  policy  of  the  state.  The 
charter  should  state  definitely  the  express  powers  of 
the  corporation. 

The  corporation  has  the  express  power  which  the 
charter  or  certificate  of  incorporation  gives  it.  A 
corporation  cannot  have  powers  which  are  contrary 
to  the  laws  or  general  public  policy  of  the  state  even 
though  an  attempted  grant  of  such  powers  should 
have  been  made  by  including  them  in  the  certificate  of 
incorporation.  Thus,  if  it  is  contrary  to  the  law  that 
a  corporation  should  be  organized  for  the  purpose 
of  dealing  in  real  estate  or  of  dealing  in  the  shares 
of  another  corporation  for  the  purpose  of  controlling 
that  other  corporation,  a  charter  attempting  to  set 
out  such  powers  would  to  that  extent  be  void.  The 
charter  powers  of  a  corporation  should  be  definitely 
stated  so  that  the  purposes  of  incorporation  are 
clear.14* 

Sec.  111.  IMPLIED  CHARTER  POWERS.  A  cor- 
poration  has  all  such  powers  Implied  from  Its  express 
charter  powers  as  are  necessary  and  reasonable  for  car- 
rying Into  effect  Its  express  charter  powers. 

Although  a  corporation  may  be  said  to  have  (be- 
sidei  the  inherent  powers)  only  those  powers  given 
it  by  its  charter,  yet  it  is  not  necessary  that  all  those 
powers  be  expressly  stated.  Many  will  be  implied 
from  the  language  used.  We  may,  so  to  speak,  "read 

14*,  See  Appendix  A,  2.     (1)   (2). 


AMERICAN  COMMEBCIAL  LAW.  135 

between  the  lines"  to  discover  many  powers  pos- 
sessed by  a  corporation.  This  is  a  necessary  doc- 
trine because  it  would  be  next  to  impossible  to  set 
forth  all  the  powers  in  detail  which  a  corporation 
shall  have.  Nor  would  any  other  doctrine  accom- 
plish any  good  end.  If  the  charter  sets  forth  the 
main  objects  of  the  corporation,  the  corporation 
should  then  be  held  to  have  all  of  those  incidental 
powers  necessary  and  convenient  for  carrying  its  ex- 
press powers  into  execution.  If  a  corporation  is 
chartered  for  the  purpose  of  manufacturing  and  sell- 
ing automobiles  it  ought  to  be  unnecessary  to  state 
that  it  shall  have  the  power  to  own  machinery  for 
that  purpose,  or  land  upon  which  to  erect  its  plant, 
or  that  it  shall  have  power  to  issue  catalogues,  print 
letterheads,  employ  clerks,  advertise  its  business,  bor- 
row money,  sign  checks  and  other  negotiable  paper, 
mortgage  its  property,  and  so  on.  And  such  is  the 
law.  All  powers  will  be  implied  which  are  incidental 
to  the  main  power  expressly  stated. 

In  this  way  a  corporation  may  enter  into  activities 
which  would  if  pursued  for  their  own  sake  be  for- 
eign to  the  purposes  of  the  corporation.  This  is 
illustrated  by  the  following  example :  A  corporation 
was  organized  for  the  purpose  of  buying  and  selling 
lumber.  It  became  surety  upon  the  bond  of  a  build- 
ing contractor  upon  the  agreement  by  him  to  pur- 
chase all  the  lumber  needed  in  a  certain  building 
from  that  corporation.  When  the  corporation  was 
sued  for  the  breach  of  this  bond,  it  defended  that 
it  was  not  organized  for  the  purpose  of  signing  bonds 
or  becoming  surety  and  therefore  it  could  not  be 
held  responsible  upon  a  contract  thus  unlawfully 
made  by  it.  But  the  court  held  that  as  it  had  signed 


136  CORPORATIONS. 

this  bond  as  an  incidental  means  of  extending  its 
own  legitimate  business,  that  of  selling  lumber,  it 
was  a  proper  contract  for  it  to  make,  and  it  was 
liable  upon  such  contract.18  Had  this  corporation 
gone  upon  some  bond,  as  for  instance,  an  appeal 
bond,  for  the  purpose  of  earning  a  premium,  the 
corporation  would  be  attempting  an  activity  beyond 
the  scope  of  its  charter  no  matter  how  profitable  the 
bonding  business  might  be  if  pursued  by  such  corpo- 
ration, because  being  a  lumber  company,  it  would 
not  have  the  power  to  write  bonds  or  become  surety 
upon  them  either  as  a  business  or  as  an  isolated 
transaction.16 

What  a  corporation  does  which  is  not  justified 
by  its  express  charter  powers  must  be  purely  inciden- 
tal or  merely  as  a  reasonable  and  convenient  means 
of  carrying  those  powers  into  execution.  The  bene- 
fit to  the  corporation  is  immaterial.  In  one  case  a 
corporation  organized  to  build  and  deal  in  sleeping 
cars  laid  out  a  town,  owning  the  homes,  construct- 
ing sewage,  water  and  lighting  systems.  The  court 
held  that  it  had  no  power  to  do  these  things,  they 
not  being  mentioned  in  the  charter  and  being  for- 
eign to  the  business  of  building  and  selling  sleeping 
cars.10' 

15.  Central  Lumber  Co.  v.  Kelter,  201  111.  503.    See  also, 
Kraft  v.  West  Side  Brew.  Co.,  219  111.  205. 

16.  Best  Brewing  Co.  v.  Klassen,   185  111.  37. 

16a.  People  v.  Pullman  Car  Co.,  175  111.  125.  Three  jus- 
tices, however,  dissented,  saying,  in  part,  "We  are  not  pre- 
pared to  condemn  [these  things]  [done]  with  the  object  of 
appealing  to  th«  better  and  more  skillful  workmen  and  secur- 
ing and  retaining  them  in  its  employment."  This  case  illus- 
trates the  differences  of  opinion  and  difficulties  attending  this 
subject. 


AMEBICAN  COMMEBOIAL  LAW.  137 

Sec.  112.    NOTICE  OF  POWERS  OF  CORPORATION. 

Any  party  must  take  notice  of  the  charter  powers  of  a 
corporation  and  be  bound  by  a  notice  of  these  powers, 
for  they  are  a  matter  of  public  record. 

Any  party  who  deals  with  a  corporation  cannot 
claim  that  he  did  not  know  the  charter  powers  of 
such  corporation,  for  these  are  a  matter  of  public 
record  and  he  is  bound  by  a  constructive  notice  of 
such  powers.  Of  the  by-laws  he  may  claim  ignorance 
in  many  cases,  where  the  corporation  has  permitted 
its  agents  to  violate  a  by-law,  or  where  the  corpo- 
ration has  taken  benefits  of  a  contract  made  contrary 
to  a  by-law;  but  this  cannot  be  said  of  charter  pow- 
ers. 

Sec.  113.  ENFORCEMENT  OF  CONTRACTS  ULTRA 
VIRES.  A  contract  made  in  excess  of  the  power 
of  the  corporation  Is  said  to  be  "ultra  vires" 
and  cannot  be  enforced  either  by  the  corporation 
or  the  other  party  thereto  so  long  as  the  contract  Is 
wholly  executory,  but  where  the  benefits  have  been 
received  under  the  contract  the  corporation  or  the 
other  party  so  receiving  them  Is  held  by  many  courts  to 
be  estopped  to  assert  this  defense.  But  in  other  juris- 
dictions the  defense  of  ultra  vires  may  be  made  even  by 
a  party  who  has  received  the  benefit  of  the  contracts; 
yet  in  such  case  the  benefits  must  be  returned  or  their 
reasonable  value  accounted  for. 

The  subject  of  the  powers  of  a  corporation  in- 
volves of  course  an  inquiry  as  to  the  effect  of  at- 
tempted user  of  powers  which  the  corporation  does 
not  have.  If  the  agents  of  a  corporation  attempt  to 
bind  it  upon  a  contract  which  it  has  no  power  to 
make  what  rights,  if  any,  can  arise  upon  such  a 


138  COBPOBATIONS. 

contract  ?  If  such  a  contract  is  wholly  executory 
when  the  corporation  or  the  other  party  fails  or  re- 
fuses to  go  on  with  it,  the  defense  of  excess  of  pow- 
ers, or,  as  we  say  technically,  the  defense  of  ultra 
vires  can  be  interposed.  But  the  more  difficult  ques- 
tions arise  where  the  party  who  is  attempting  to  as- 
sert the  defense  has  received  benefits  under  the  con- 
tract. Many  courts  say  that  in  such  a  case  he  will 
not  be  permitted  to  set  up  the  defense.  By  his  con- 
duct he  is  estopped.  But  in  other  courts  if  the 
corporation  sues  the  other  party,  or  if  the  other  party 
sues  the  corporation,  the  defense  of  ultra  v(res  may 
be  set  up  even  though  the  party  defending  has 
received  benefits  under  the  contract.  In  such  a  case 
the  benefits  would  have  to  be  accounted  for  at  their 
reasonable  value. 

This  subject  of  ultra  tires  is  a  very  extensive  one 
and  has  been  variously  applied  by  the  different  courts, 
and  even  by  the  same  courts,  and  it  is  not  possible  to 
go  into  an  extensive  treatment  or  give  illustrations 
here,  yet  in  a  very  general  way  it  is  believed  that  the 
statement  here  made  is  a  correct  statement  of  the 
law  and  will  suffice  for  our  purposes. 


CHAPTER  17. 


CERTAIN  PARTICULAR  CORPORATE  POWERS  CONSIDERED. 

Sec.  114.  POWER  OF  THE  CORPORATION  TO 
ACQUIRE  AND  HOLD  REAL  ESTATE.  A  corporation 
organized  for  any  purpose  has  the  right  t»  own  and 
hold  as  much  real  estate  as  Is  necessary  and  reasonable 
to  enable  it  to  pursue  its  objects. 

Every  corporation  has  the  implied  right  to  own  as 
much  property  both  personal  and  real  as  is  required 
for  the  purpose  of  carrying  out  its  charter  powers. 
It  is,  of  course,  essential  that  every  corporation,  to 
pursue  its  objects,  have  a  plant  and  its  office  and  so 
on,  and  therefore  it  is  never  necessary  to  state  in  the 
charter  that  the  corporation  shall  have  the  right  to 
acquire  and  hold  the  necessary  real  estate,  for  these 
are  incidental  powers. 

If  a  corporation  which  is  organized  for  a  legitimate 
purpose  holds  more  than  the  necessary  amount  of 
property,  it  may  be  compelled  to  sell  it  at  the  suit 
of  the  state,  but  no  person  other  than  the  state  can 
question  whether  or  not  it  is  exceeding  its  powers 
in  this  regard. 

Though  a  corporation  may  not  by  law  acquire 
large  property  holdings  for  the  mere  purpose  of 
renting  them  out,  where  that  is  not  its  charter  power, 
still  it  is  acting  entirely  within  its  power  when  it 
acquires  such  property  to  provide  for  its  reasonable 
growth.  Thus,  the  attorney-general  of  Illinois  ques- 

(139) 


140  COBPOBATIONS. 

tioned  the  right  of  the  Pullman  Company  to  erect  a 
large  office  building  which  it  rented  out  to  tenants. 
But  the  court  found  that  it  was  only  looking  for- 
ward to  reasonable  growth,  and  could  erect  a  building 
to  provide  for  such  reasonable  growth  though  not 
then  necessary,  and  that  pending  its  own  need  of  the 
place,  it  could  rent  to  tenants.  1T 

Sec.  115.  POWER  OF  CORPORATION  TO  BORROW 
MONEY,  MORTGAGE  ITS  PROPERTY,  ETC.  The  COP- 
poration  has  an  Implied  power  to  borrow  money  and  as 
an  incidental  means  thereto  may  mortgage  its  prop- 
erty, Issue  negotiable  paper,  etc. 

It  is  the  right  of  a  private  corporation  to  borrow 
money,  though  no  express  power  has  been  given  it 
to  that  end,  and  because  it  has  this  power  to  borrow 
money  it  follows  that  it  has  the  power  to  give  the 
necessary  security  by  way  of  mortgage,  so  that  such 
loan  may  be  accomplished.  Also  it  follows  that  it 
has  the  power  to  issue  the  evidences  of  its  debt, 
namely  negotiable  or  non-negotiable  instruments,  as 
bonds,  promissory  notes,  etc. 

Sec.  116.  POWER  OF  CORPORATION  TO  LOAN 
MONEY.  Unless  a  corporation  is  organized  as  a  bank, 
It  has  no  power  to  loan  money  for  the  mere  purpose  of 
making  a  loan. 

As  surplus  earnings  of  a  corporation  are  to  be 
used  for  the  payment  of  dividends,  a  corporation  is 
held  to  have  no  right  to  make  loans  for  mere  in- 
cidental advantage,  yet  in  proper  cases  where  the 

17.    People  r.  Pullman's  Pala*  Car  Co.,  175  HI.  125. 


AMEBICAN  COMMEBOIAL  LAW.          141 

money  was  being  accumulated  for  the  purposes  of 
increasing  equipment  and  so  on,  it  would  un- 
doubtedly be  the  corporation's  right  to  make  short- 
term  loans  upon  proper  security. 

Sec.  117.  POWER  OF  CORPORATION  TO  SELL  ITS 
PROPERTY.  Assuming  that  there  is  no  dissent  among 
the  stockholders,  every  corporation  has  the  power  to 
sell  all  of  its  property  and  discontinue  business  unless 
it  is  a  public  coporation. 

While  it  is  true  that  any  dissenting  stockholder 
can  prevent  the  sale  of  the  property  of  a  going  con- 
cern in  the  absence  of  some  enabling  statute  which  is 
being  pursued,  still  it  is  true  that  when  no  such  ob- 
jection is  made,  any  private  corporation  can  sell  its 
entire  equipment  and  discontinue  business.  This  is 
not  true  of  public  corporations,  which  can  not  sell 
their  businesses  except  in  compliance  with  various 
statutes  passed  to  that  end. 

The  charter  of  a  corporation  can  not  be  sold  by 
the  corporation,  as  only  the  state  can  grant  a  charter, 
but  the  charter  is  as  a  matter  of  fact  practically  sold 
by  having  all  of  the  stockholders  sell  their  stock 
to  the  parties  who  desire  to  buy  the  corporation. 
These  new  parties  thereupon,  being  all  the  stockhold- 
ers, own  the  corporation. 

Sec.  118.  POWER  OF  CORPORATION  TO  ACQUIRE 
SHARES  IN  OTHER  CORPORATIONS.  A  corporation 
has  no  power  to  acquire  shares  in  other  corporations  for 
the  mere  purpose  of  being  a  shareholder  unless  author* 
ized  by  Its  charter  or  a  governing  statute. 

In  some  states  it  is  allowable  for  a  corporation  to 
have  a  charter  providing  for  the  holding  of  shares  in 


142  COBPORATTONS. 

other  corporations.  In  other  states  it  is  considered 
against  public  policy  to  permit  such  a  power.  No 
corporation  has  this  power  unless  given  by  its  charter 
or  by  a  general  law.  In  any  case,  however,  where 
it  would  be  necessary  for  the  protection  of  a  cor- 
poration to  acquire  shares  merely  as  property,  as 
where  it  seized  them  upon  attachment  or  execution, 
it  would  be  acting  legitimately.  In  such  a  case  it 
would  not  be  acquiring  them  in  order  to  be  a  stock- 
holder but  merely  to  hold  them  as  property. 

Sec.  119.  POWER  OF  CORPORATION  TO  ACQUIRE 
ITS  OWN  SHARES.  A  corporation  has  power  to  buy 
In  Its  own  shares  when  no  harm  Is  thereby  done  cred- 
itors. 

If  the  purpose  of  a  corporation  is  a  proper  one, 
and  its  exercise  is  not  in  fraud  of  the  rights  of  cred- 
itors, a  corporation  may  buy  its  own  shares.  Such 
stock  is  called  treasury  stock  and  may  be  re-issued. 
The  same  certificates  however,  should  never  be  re- 
issued. 


PART  VI. 


CHAPTER  18. 

FOREIGN  CORPORATIONS. 

8eo.  120.  DEFINITION  AND  GENERAL  STATE- 
MENT. A  foreign  corporation  Is  a  corporation  Incor- 
porated under  the  laws  of  tome  state  other  than  th« 
state  In  which  its  rights  are  under  consideration.  A 
corporation  has  no  rights  outside  of  the  state  which 
Incorporates  it,  except  by  comity  and  except  in  certain 
cases  given  under  the  Federal  Constitution. 

As  a  corporation  is  created  by  the  laws  of  the 
state  and  therefrom  derives  its  entire  existence,  it 
follows  that  it  has  no  rights  outside  of  the  legislative 
jurisdiction  of  the  state  which  created  it.  There  are, 
it  is  true,  some  cases  in  which  a  corporation  is  en- 
titled to  enter  other  states  because  of  provisions  in 
the  United  States  Constitution  which  will  be  noted 
later.  It  is  also  true  that  most  states  do  not 
prevent  corporations  from  entering,  but  permit 
them  to  come  in  through  comity,  providing,  however, 
more  or  less  drastic  laws  with  which  they  must  com- 
ply before  they  enter,  unless  they  enter  under  the 
aforesaid  provisions  of  the  United  States  Constitu- 
tion. 

Sec.  121.  COMMON  PROVISIONS  IN  RESPECT  TO 
FOREIGN  CORPORATIONS.  It  la  usually  provided  In 


144  COBPOBATIONS. 

the  various  states  that  a  corporation  of  another  state 
must  file  certain  papers  and  pay  certain  fees  and  take 
other  steps  before  it  shall  have  any  right  to  do  business. 

All  of  the  states  have  foreign  corporation  laws, 
some  of  which  are  quite  drastic.  These  laws  usually 
provide  that  a  copy  of  the  charter  must  be  filed, 
certain  fees  must  be  paid,  and  a  statement  made  and 
filed,  setting  forth  where  the  principal  office  is  to 
be  located,  an  officer  or  representative  on  whom 
service  of  legal  papers  may  be  made,  etc. 

The  penalty  for  not  complying  with  this  law  is 
usually  in  the  shape  of  a  fine,  and  also  a  provision 
that  the  corporation  shall  have  no  right  to  sue  upon 
contracts  made  or  rights  accruing  before  it  had 
complied  with  the  law. 

Sec.  122.  WHAT  CONSTITUTES  "DOING  BUSI- 
NESS" IN  ANOTHER  STATE.  These  foreign  corpora- 
tion  laws  do  not  apply  to  a  foreign  corporation  unless 
it  Is  doing  business  within  the  jurisdiction  within  the 
meaning  of  the  statute. 

The  statutes  of  the  various  states  provide  the 
penalties  above  mentioned  in  case  a  foreign  cor- 
poration enters  its  boundaries  to  do  business.  It 
then  becomes  of  great  importance  to  determine 
whether  a  corporation  which  has  not  complied  with 
such  law  was  doing  business  within  the  meaning  of 
the  statute.  Thus  the  A.  &  B.  Manufacturing  Co., 
organized  under  the  laws  of  New  York,  starts  suit 
in  Illinois  against  a  defendant  residing  in  Illinois. 
It  has  not  complied  with  the  foreign  corporation 
law  of  Illinois. 


AMEEICAN  COMMEBOIAL  LAW.  145 

That  fact  is  set  up  by  way  of  defense.  The  cor- 
poration then  replies  that  the  defense  is  not  good 
because  it  was  not  and  is  not  doing  business  in  Ill- 
inois. 

It  is  well  decided  that  single  isolated  transactions 
do  not  constitute  doing  business.  Buying  real  es- 
tate, being  grantor  or  grantee  in  a  mortgage,  hold- 
ing stockholders'  meetings,  selling  shares,  are  all 
examples  of  what  is  not  "doing  business."  So  send- 
ing a  traveling  salesman  into  a  state  to  receive  or- 
ders, and  transmit  them  to  the  home  office  where 
they  are  accepted  and  filled,  is  not  "doing  business." 

Doing  business  then  consists  in  practically  coming 
into  the  state  for  the  purpose  of  conducting  in  whole 
or  part,  the  business  of  the  company.  As  where 
branch  offices  are  opened  up  at  which  contracts  are 
closed,  goods  sold,  etc. 

Sec.  123.  WHEN  FOREIGN  CORPORATION  HAS 
CONSTITUTIONAL  RIGHT  TO  ENTER  OTHER 
STATES.  Any  corporation  which  is  engaging  in  Inter- 
state commerce  or  which  is  employed  by  the  United 
States  may  enter  any  other  state  in  the  Union  for  the 
purpose  of  carrying  on  such  business. 

The  United  States  Constitution  gives  to  the  Fed- 
eral government  all  rights  over  interstate  commerce 
and  no  state  can  pass  any  law  or  take  any  action 
which  will  interfere  in  any  way  with  interstate  com- 
merce unless  the  Federal  Congress  gives  it  that 
right.  So  any  corporation  which  is  engaged  in  in- 
terstate commerce  may  enter  any  other  state  for  the 
purpose  of  carrying  on  that  business  and  can  not 
be  restrained  by  the  foreign  corporation  law  of  any 

I  B— 10 


146  CORPORATIONS. 

state.  Also,  if  it  is  engaged  in  the  business  of  the 
United  States,  it  may  enter  any  state  in  order  to 
carry  on  such  business. 

Interstate  commerce  consists  in  the  commercial 
intercourse  of  people  of  one  state  with  those  of 
another.  It  includes  the  carrying  of  passengers  from 
state  to  state,  the  transmission  of  language  by  tele- 
graph, telephone,  mail  or  otherwise,  the  shipping  of 
goods  from  state  to  state.  If  goods  are  ordered  by 
a  resident  of  Illinois  from  a  corporation  doing  bus- 
iness in  Indiana,  to  be  shipped  to  the  buyer  in  Illinois, 
this  is  interstate  commerce,  and  the  Indiana  cor- 
poration need  not  comply  with  the  Illinois  Foreign 
Corporation  Law.  If  the  buyer  in  Illinois  refuses 
to  pay,  the  Indiana  Corporation  may  enter  Illinois 
and  bring  suit  without  complying  with  the  foreign 
corporation  law. 

Sec.  124.  SUIT  AGAINST  FOREIGN  CORPORA- 
TIONS.  Any  foreign  corporation  can  be  cued  In  any 
state  In  which  It  la  doing  busintsa  whether  It  hat  com- 
piled with  the  foreign  corporation  law  or  net,  and  eer- 
vlce  may  be  obtained  by  eervlng  any  officer  who  can 
be  found  In  that  Jurisdiction  or  by  eelzlng  any  prop- 
erty that  there  may  be  found. 

A  corporation  may  be  sued  either  in  the  state  in 
which  it  is  organized  or  in  any  state  into  which  it 
has  gone  for  the  purpose  of  doing  business.  If  it 
is  not  doing  business  within  a  state  it  can  not  be  sued 
in  such  state  no  matter  though  its  officers  may  be 
found  there.  Thus,  if  a  corporation  is  organized  in 
the  state  of  New  York  and  does  not  do  business  in 
the  state  of  Illinois  and  has  no  property  in  the  state 
of  Illinois,  it  can  not  be  sued  in  the  state  of  Illinois, 


AMERICAN  COMMERCIAL  LAW.  147 

even  though  its  officers  live  there  or  are  there  tem- 
porarily and  service  can  be  had  upon  them.  Such 
sen-ice  is  not  good  and  will  be  quashed.  If  a  cor- 
poration has  entered  a  state  to  do  business  therein, 
it  may  be  sued  in  such  state  whether  or  not  it  has 
complied  with  the  foreign  corporation  law,  but  it 
cannot  bring  suit  in  many  states  where  that  is  made 
the  penalty  for  non-compliance. 


PART  vn. 

CHAPTER  19. 

TRUSTS  AND  MONOPLIES. 

Sec.  125.  A  "TRUST"  DEFINED.  The  term  "trust" 
Is  used  In  corporation  law  (among  other  uses)  to  denote 
that  stockholders  of  different  corporations  have  assigned 
their  stock  In  trust  to  a  central  body  of  trustees  who 
shall  hold  such  stock  for  a  certain  period  to 
vote  it  for  the  stockholders  in  order  to  give  a  common 
control  of  such  corporations  and  prevent  competition. 
It  is  illegal.  Such  term  has  also  by  popular  usage  come 
to  denote  any  large  corporation  of  monopolistic  tenden- 
cies. 

The  term  "trust"  is  by  no  means  confined  to  a 
place  in  the  law  of  corporations.  In  fact  it  has,  per- 
haps, its  smallest  application  there.  Our  law  per- 
mits the  division  of  title  into  two  parts — the  legal 
title  and  the  beneficial  title.  These  are  oftenest  in 
the  same  person,  as  where  one  for  his  own  use  has 
titles  to  lands  or  chattels  of  any  sort.  But  the  legal 
title  may  be  in  one  in  trust  for  another,  or  charged 
with  trusts  for  another.  Thus  one  may  by  deed  or 
will  give  his  land  to  a  natural  person  or  a  corporation 
in  trust  for  another,  thereby  putting  the  legal  title 
and  control  of  such  land  in  one,  and  the  right  to  its 
benefits  in  another;  ultimately  the  legal  title  must 
also  come  to  that  other  unless  the  trust  is  a  mere 

(148) 


j&MEBICAN  COMMBBOIAL  LAW.  149 

charge  upon  the  property  for  a  limited  period.  This 
disposition  of  property  is  of  ancient  sanction  and  is 
not  only  legal  but,  in  many  cases,  highly  commendable 
so  long  as  it  is  opposed  to  no  other  rule  of  law.  One 
may  bestow  shares  of  stock  in  trust  the  same  as  any 
other  species  of  property.  For  instance  he  may  in 
his  will  bequeath  certain  shares  of  stock  to  his  broth- 
er to  hold  in  trust  for  his  son  until  his  son  becomes 
of  age.  Thus  we  see  that  the  term  "trust"  in  its 
large  sense  holds  no  invidious  meaning.  Corpora- 
tions, indeed,  as  every  one  knows,  are  often  chartered 
to  act  as  trustees. 

In  order  to  avoid  competition  among  rival  con- 
cerns, and  put  them  under  a  common  control  whereby 
output  and  prices  could  be  regulated,  it  was  consid- 
ered that  the  result  would  be  accomplished  if  a  cen- 
tral body  of  trustees  should  be  created  to  whom  all 
the  shareholders  should  transfer  their  shares  for  a 
certain  period,  such  trustees  to  hold  such  shares  in 
trust  for  the  stockholders,  to  pay  the  dividends  to 
them,  and  after  a  period  to  re-transfer  to  them, 
such  stockholders  to  be  given  in  return  trust  cer- 
tificates, which  should  serve  them  instead  of  the 
assigned  stock  certificate.  In  this  way  the  central  trus- 
tees holding  the  legal  title  to  the  stock  upon  the  trusts 
mentioned  could  vote  such  stock  and  thereby  con- 
trol the  directorate  and  the  corporation.  A  corpora- 
tion whose  stockholders  were  subject  to  any  such  an 
arrangement  was  said  to  be  "in  the  trust."  Such  trust 
might  or  might  not  constitute  a  monopoly  or  virtual 
monopoly.  But  in  any  case  whether  large  or  small 
and  no  matter  on  what  lines  conducted  it  is  illegal. 
Its  purpose  is  to  destroy  competition  and  control 
output  and  prices.  It  has  also  been  declared  to  be 


150  CoBPOBATIONg. 

illegal  because  it  puts  the  control  of  the  corporation 
out  of  the  hand  of  those  who  ought  to  control  it.18 

Sec.  120.  CONSOLIDATION  OF  CORPORATIONS. 
Corporations  may  consolidate  either  by  a  reorganization 
after  a  dlHolutlon  of  each  of  them  or  by  proceeding  ac- 
cording to  the  statute  which  provides  for  consolidation, 
A  consolidation  of  many  corporations  into  one  is  not 
Illegal  except  where  a  monopoly  is  thereby  created  or 
trade  unreasonably  restrained. 

Recent  years  have  seen  the  rise  of  large  corpora- 
tions whose  operations  are  national  or  international 
in  extent.  Many  of  these  have  arisen  by  the  con- 
solidation of  many  businesses,  incorporated  or  un- 
incorporated. There  is  no  illegality  in  the  mere  fact 
that  a  corporation  is  large  or  that  it  is  the  result  of 
a  consolidation  of  many  corporations.  The  statutes, 
indeed,  provide  the  means  whereby  consolidation  may 
be  brought  about,  and  in  that  sense  may  be  said  to 
encourage  it.  Such  corporations  though  the  result 
of  a  desire  to  decrease  the  cost  of  independent  opera- 
tion and  to  avoid  the  competition  otherwise  entailed 
are  no  more  illegal  than  when  two  grocers  who  have 
operated  independently  decide  to  become  partners. 
They  become  illegal  when  they  result  in  monopoly 
or  are  in  unreasonable  restraint  of  trade,  as  we  dis- 
cuss in  the  next  section. 

See.  127.  CORPORATIONS  FORMED  TO  MONOPO- 
LIZE OR  RESTRAIN  TRADE.  A  corporation  which  is 
formed  for  or  brings  about  monopoly  or  which  unrea- 

li.    Sea  Sec.  55,  as  to  Toting  trusts  which  «r«  legal. 


AMERICAN  COMMERCIAL  LAW.  151 

eonably  restrains  trade  and  agreements  to  monopolize  or 
unreasonably  restrain  trade  are  Illegal. 

Monopolies  and  agreements  to  unreasonably  re- 
strain trade  are  against  public  policy  by  the  principles 
of  the  common  law  and  by  numerous  statutes  passed 
for  that  purpose.  The  term  "monopoly"  signifies  that 
there  is  a  control  of  all  or  virtually  all  of  the  pro- 
duction or  output  of  a  certain  line  of  trade.  There 
must  be  this  control  or  there  is  no  monopoly.  Thus 
a  corporation  might  have  all  the  trade  in  the  country 
because  of  the  fact  that  no  other  person  or  corpora- 
tion was  successfully  carrying  on  that  trade.  Monop- 
oly signifies  then,  that  all  of  the  forces  of  output 
have  in  some  way  been  controlled  or  purchased.  An 
agreement  in  unreasonable  restraint  of  trade  is  illegal. 
It  has  always  been  legal  to  restrain  trade  to  a  reason- 
able extent,  as  where  one  person  sells  his  business 
to  another  and  agrees  not  to  compete  within  a  cer- 
tain territory.  But  any  agreement  between  parties 
which  has  for  its  purpose  control  of  output  and  sti- 
fling of  competition  is  illegal. 

The  various  states  have  statutes  which  provide 
for  prosecution  and  even  dissolution  of  corporations 
which  are  operating  as  monopolies  or  in  restraint 
of  trade.  The  United  States  passed  a  law  in  1890 
known  as  the  "Sherman  Law"  or  "Sherman  Anti- 
Trust  Law,"  under  which  many  well  known  cases 
have  been  prosecuted. 


PART  vm. 


CHAPTER  20. 

DISSOLUTION  AND  WINDING  UP  OF  CORPORATIONS. 

Sec.  128.  WAYS  IN  WHICH  A  CORPORATION  MAY 
BE  DISSOLVED.  A  corporation  may  be  dissolved  (a) 
by  expiration  of  time  stated  In  charter,  (b)  by  act  of 
the  legislature,  (c)  by  judicial  decree,  (d)  by  voluntary 
act  of  its  stockholders,  (e)  by  non-user. 

Corporations  organized  by  special  acts  in  former 
times  have  usually  perpetual  life.  No  time  is  stated 
for  their  expiration.  Usually  now  under  the  general 
statutes,  a  corporation  can  not  be  organized  for  more 
than  a  certain  period  of  time.  In  Illinois,  for  in- 
stance, the  time  is  ninety-nine  years.  At  the  end  of 
such  time  corporate  existence  may  be  renewed  by 
complying  with  the  statute. 

The  legislature  now  reserves  the  right  to  alter, 
amend  or  repeal  charters.  If  it  exercises  such  power 
it  must  do  so  without  violating  the  obligation  of 
contracts  (other  than  those  included  in  the  charter 
itself)  and  without  depriving  the  corporation  of  its 
property  without  due  process  of  law.  The  general 
corporation  laws  of  the  state  are  often  changed  with 
the  effect  of  altering  to  some  extent  the  charters 
obtained  under  them,  but  this  is  as  far  as  legis- 
lation goes.  Any  law  repealing  or  altering  charters 

(152) 


AMEKICAN  COMMEBCIAL  LAW.  153 

would  have  to  be  general.  It  could  not  pick  out 
certain  corporations  and  not  affect  others  of  the 
same  kind. 

The  courts  may  in  proper  cases  dissolve  a  corpora- 
tion. The  statute  usually  gives  the  right  to  the 
attorney  general  to  proceed  against  a  corporation  for 
non-use  of  its  charter,  or  for  violation  thereof,  and 
have  the  charter  revoked.  The  creditors,  also,  of  an 
insolvent  corporation  may  proceed  against  it  for  the 
purpose  of  having  its  assets  distributed  and  its  exist- 
ence ended.  Proceedings  in  bankruptcy,  however, 
do  not  in  theory,  however  it  may  be  in  fact,  dissolve 
a  corporation.  A  bankrupt  corporation  is  entitled 
to  its  discharge  in  bankruptcy. 

The  stockholders  may  by  mutual  consent  dissolve 
a  corporation.  The  statute  usually  provides  a  way 
in  which  this  may  be  done.  Non-user  for  a  long 
time  may  under  statutes  amount  to  forfeiture  of  a 
charter.  Non-user  of  some  power,  however  long 
continued,  does  not  deprive  a  corporation  of  such 
power. 

Sec.  129.  RESULTS  OF  DISSOLUTION.  Upon  dis- 
solution the  assets  of  a  corporation  are  to  be  applied  to 
the  payment  of  Its  debts,  the  balance  to  be  distributed 
among  the  stockholders. 

When  a  corporation  is  dissolved,  its  assets  go  to 
the  payment  of  its  debts.  What  assets  have  been 
given  as  security  are  of  course  applicable  only  to  that 
purpose  so  long  as  the  secured  debt  is  unpaid. 
Creditors  with  liens  are  to  be  satisfied  in  the  order 
of  the  priority  of  their  liens.  General  creditors  share 
pro  rata  after  the  better  classes  of  debts  'are  paid. 


154  CORPORATIONS. 

After  debts  are  paid,  the  balance  of  the  assets  are 
distributed  among  the  shareholders.  If  there  are 
shareholders  holding  shares  which  are  preferential 
as  to  assets,  they  are  to  be  first  satisfied.  But  pre- 
ferred shareholders  come  in  ahead  of  common  stock- 
holders only,  not  ahead  of  creditors. 


APPENDIX  A. 


FORMS. 


Page 

1.  Statement  of  a  proposal  to  form  corporation  under 

Illinois    Law    157 

2.  Illustrative  object  provisions  in  charter 158 

3.  Form  of  By-Laws 159 

4.  Subscription  contract 164 

5.  Certificate  of  stock    164 

6.  Power  of  attorney  on  back  of  certificate 165 

7.  Stub  from  which  certificate  is  detached  165 

8.  Notice  of  annual  meeting 166 

9.  Proxy  for  annual  meeting   166 

10.  Minutes  of  annual  meeting 167 

11.  Minutes  of  directors'  meeting 169 

12.  Certificate  of  copy-  of  resolution  for  bank 172 

13.  Resolution    declaring   dividend    172 

14.  Notice  of  special  meeting 173 

15.  Form  of  resignation  for  officer  173 


(158) 


APPENDIX  A. 


FORMS. 

1.  The  statement  of  a  proposal  to  form  a  stock  corpo- 
ration under  Illinois  laws. 

State  of  Illinois, 
County. 

To  James  A.  Rose,  Secretary  of  State: 
We,   the  undersigned,    , 


propose  to  form  a  corporation  under  an  act  of  the  Gen- 
eral Assembly  of  the  State  of  Illinois  entitled  "An  Act 
Concerning  Corporations,"  approved  April  18,  1872,  and  all 
acts  amendatory  thereof:  and  that  for  the  purposes  of  such 
organization  we  hereby  state  as  follows,  to-wit: 

1.    The  name  of  such  corporation  is  


2.    The  object  for  which  it  is  formed  is 


5.  The  capital  stock  shall  be   .. 
4.    The  amount  of  each  share  is 

6.  The  number  of  shares   


(157) 


158  COBPOBATIONS. 

0.    Th«  location  of  the  principal  office  is  la 

in   the   County   of    Stats 

of  Illinois. 

7.    The  duration  of  the  Corporation  ahall  be  

years. 


(Note. — This  must  be  acknowledged  and  sworn  to  before 
a  notary  public  and  a  form  for  that  purpose  is  printed  on 
the  back  thereof.  The  parties  signing  this  statement  are 
called  "Commissioners."  There  must  be  at  least  three  and 
not  more  than  seven,  in  Illinois.) 

2.  Illustrative  object  provisions  In  charter. 

(1)  To  own  and  conduct  a  restaurant. 

"The  object  of  this  corporation  shall  be  to  own,  operate 
and  conduct  restaurants,  lunch  rooms,  cafeterias  and  eating 
houses  and  places  of  refreshment.  To  own  and  operate  bak- 
eries and  kitchens  for  the  preparation  of  bakery  goods  and 
foodstuffs  of  every  sort  for  use  in  its  own  restaurants, 
lunch  rooms  and  other  places  and  for  sale  at  wholesale  or 
retail  to  others  or  upon  hire  for  others.  To  carry  on  a 
general  catering  business,  and  in  general  to  do  all  and  every 
thing  that  may  properly  appertain  to  the  business  of  con- 
ducting restaurants  and  lunch  rooms  of  all  classes  and  de- 
scriptions and  the  business  of  preparing  food  for  consump- 
tion at  wholesale  or  retail,  and  a  general  catering  busi- 
ness." 

(2)  To  own  and  operate  a  laundry. 

"The  object  of  this  corporation  shall  be  to  own,  operate 
and  conduct  the  business  of  a  laundry  for  the  washing,  clean- 
ing, ironing,  pressing,  renovating  of  wearing  apparel,  house- 
hold linen  and  clothes  of  every  kind  and  description;  to 
dye  and  dry  clean  all  sorts  of  fabrics;  and  to  buy,  sell  and 
deal  in  all  kinds  of  machinery  necessary  or  useful  in  the 
laundry,  cleaning  and  dyeing  business." 


AMEBICAN  COMMERCIAL  LAW.  159 

3.   Form  of  by-laws. 

(Note:  These  by-laws  are  intended  to  be  merely  suggest- 
ive; in  any  case  the  by-laws  adopted  should  be  framed  ac- 
cording to  the  actual  needs  and  circumstances  of  the  par- 
ticular corporation.) 

ARTICLE  I. 

STOCK. 

Sec.  1.  Certificates  of  stock  shall  be  in  such  form  as 
the  President  shall  decide.  All  certificates  must  be  signed 
by  the  President  and  the  corporate  seal  shall  be  affixed  and 
attested  by  the  Secretary. 

Sec.  2.  Shares  of  capital  stock  may  be  transferred  by 
endorsement  on  the  certificate  in  the  usual  form  and  the 
surrender  of  such  certificate  to  the  Secretary  for  cancella- 
tion, who  shall  take  up  and  cancel  the  same  attaching  it 
to  the  original  stub  and  who  shall  thereupon  issue  a  new 
certificate  to  the  transferee. 

Sec.  3.  The  stock  books  of  the  company  shall  be  closed 
to  transfers  forty-eight  hours  before  the  annual  meeting. 

ARTICLE  II. 

STOCKHOLDERS. 

See.  1.  The  annual  meeting  shall  be  held  on  the  first 
Friday  after  the  first  Monday  of  January  of  each  year  at 
the  hour  of  8  o'clock  P.  M.,  at  the  general  offices  of  the 
company,  for  the  election  of  directors  or  the  transaction 
of  such  other  business  a*  may  come  before  the  meeting. 

Sec.  2.  Special  meetings  may  be  held  at  any  time  upon 
call  by  the  President  whenever  he  shall  deem  a  special 
meeting  advisable  or  whenever  he  is  so  directed  by  a  res- 


160  COBPOBA.TIONS. 

olution  of  the  Board  of  Directors,  or  whenever  the  stock- 
holders representing  one-third  of  the  capital  stock  shall 
request  him  in  writing  so  to  do,  specifying  in  such  writing 
the  time  and  object.  Such  meeting  shall  be  held  at  the 
same  place  and  at  the  same  hour  of  the  day  as  is  provided 
for  holding  the  annual  meeting. 

Sec.  3.  The  Secretary  shall  mail  to  every  registered 
stockholder  at  his  known  place  of  residence  a  written  or 
printed  notice  of  the  time  and  place  of  holding  every  an- 
nual or  special  meeting,  and  in  case  of  special  meetings 
shall  state  the  object  of  the  meeting.  Such  notice  must 
be  mailed  at  least  five  days  prior  to  the  time  of  holding 
the  meeting.  Provided  that  stockholders  may  come  together 
in  special  meeting  at  any  time  without  notice  provided  all 
stock  is  represented  in  person  or  by  proxy,  and  notice  may 
in  every  case  be  waived. 

Sec.  4.  A  majority  of  the  stock  must  be  present  at  any 
meeting  to  constitute  a  quorum.  But  a  smaller  number 
may  adjourn  the  meeting  to  some  other  time  without  fur- 
ther notice. 

Sec.  5.  No  business  shall  be  transacted  at  any  special 
meeting  or  any  adjournment  thereof  except  such  as  shall 
be  mentioned  in  the  notice;  unless  all  stock  is  present  or 
represented  and  other  business  ifi  introduced  by  unanimous 
consent. 

Sec.  6.  The  President  and  Secretary  of  this  corporation 
shall  act  as  President  and  Secretary  of  the  meeting,  unless 
the  meeting  shall  elect  a  Chairman  and  Secretary  pro  tern 
to  act  in  their  stead. 

Sec.  7.  The  stockholders  shall  elect  at  every  annual 
stockholders'  meeting  from  among  their  number  a  board  of 
five  directors  to  serve  for  one  year  or  until  their  succes- 
sors are  elected  and  duly  qualified. 

Sec.  8.  Voting  for  directors  shall  be  by  ballot,  and  all 
other  votes  shall  be  by  ballot  when  the  majority  of  those 
present  so  demand. 


AMEBICAN  COMMEBCIAL  LAW.  161 

Sec.  9     The  order  of  business  at  the  annual  meeting  shall 
be  as  follows: 

1.  Reading   and    disposal    of   minutes   of   last   meeting 

and  all  other  undisposed  of  minutes. 

2.  Annual  Reports. 

3.  Reports  of  Committees. 

4.  Unfinished  Business. 

5.  New  Business. 


ARTICLE  TIL 

DIBECTOBS. 

Sec.  1.  The  affairs  of  this  corporation  shall  be  managed 
by  a  Board  of  Directors  who  shall  be  elected  by  the  stock- 
holders at  their  regular  annual  meeting  and  who  shall  hold 
office  for  one  year  or  until  their  successors  are  elected  and 
qualified.  Any  vacancy  occurring  in  the  board  may  be  filled 
by  the  other  members  thereof  for  the  unexpired  period. 

Sec.  2.  No  person  shall  be  eligible  to  the  "office  of  direc- 
tor who  is  not  a  stockholder.  A  transfer  by  a  director  of 
all  his  stock  shall  operate  as  a  resignation  by  him. 

Sec.  3.  No  director  shall  receive  any  salary  or  com- 
pensation for  his  services  as  director. 

Sec.  4.  The  directors  shall  meet  in  regular  session  once 
a  year  immediately  after  the  annual  stockholders'  meet- 
ing and  at  the  same  place  and  also  shall  meet  once  every 
month  on  the  third  Monday  thereof  at  3  o'clock  P.  M.,  at 
the  general  office  of  the  company.  A  reminder  of  these 
monthly  meetings  shall  be  mailed  by  the  Secretary  twenty- 
four  hours  before  the  time  of  the  meeting. 

Sec.  5.  Special  meetings  may  be  called  at  any  time  by 
the  President  or  any  three  directors.  The  other  director* 

B   B— 11 


162  COBPOBATIONS. 


•hall  be  entitled  to  three  days'  notice  of  such  meetings,  but 
the  directors  may  meet  in  special  session  at  any  time  with- 
out notice  if  all  attend  or  waive  notice. 

Sec.  6.    A   quorum   shall   consist   in   a   majority   of   the 
directors. 


ARTICLE  IV. 

OFFICERS. 

See.  1.  The  officers  of  this  corporation  shall  consist  in 
a  President,  a  Vice  President,  a  Treasurer  and  a  Secretary. 
They  shall  be  elected  by  the  directors  at  their  annual  meet- 
ing and  hold  office  for  one  year  or  until  their  successors 
are  elected  and  qualified. 

Sec.  2.  No  officer  except  the  Secretary  shall  be  other 
than  a  stockholder.  A  sale  of  all  his  stock  by  any  such 
officer  shall  operate  as  a  resignation  by  him  of  his  office. 

Sec.  3.  All  officers  may  be  required  by  the  directors  to 
give  bonds  in  such  sums  and  with  such  sureties  as  the  Di- 
rectors shall  determine.  Such  bonds  shall  be  conditioned 
for  the  faithful  performance  of  the  duties  of  their  office. 

Sec.  4.  The  directors  may  at  any  time  demand  the 
resignation  of  any  officer,  and  upon  refusal,  may  dismiss 
said  officer  and  elect  his  successor. 

Sec.  5.  The  President  shall  have  general  charge  of  the 
affairs  of  the  company.  He  shall  have  supervision  over  and 
direction  of  all  officers  and  employees  of  the  company,  and 
shall  see  that  their  duties  are  properly  performed.  He  shall 
sign  all  bonds,  obligations  or  other  contracts  in  the  name 
of  the  company.  He  shall  preside  at  the  meetings  of  the 
Board  of  Directors.  He  shall  present  a  report  of  the  year's 
business  to  the  directors  just  before  the  annual  stockhold- 
ers' meeting  and  the  same  shall  be  read  at  such  annual 
meeting. 


AMERICAN  COMMERCIAL  LAW.  163 

The  President  shall  hare  power  from  time  to  time  to 
employ  clerks  and  agents  and  fix  their  salaries.  But  this 
power  shall  be  at  all  times  under  the  immediate  control  of 
the  Board  of  Directors. 

Sec.  6.  The  Vice  President  shall  preside  at  the  meetings 
of  the  Board  of  Directors  in  the  absence  or  disability  of  the 
President  and  shall  perform  such  other  duties  as  the  direc- 
tors may  by  resolution  prescribe. 

Sec.  7.  The  Treasurer  shall  receive  and  disburse  all 
funds  of  the  company.  He  shall  keep  the  funds  in  some 
Chicago  Bank  and  shall  deposit  all  money  received  in  the 
bank  account  of  this  company  to  its  credit.  The  Treasurer 
of  the  company  shall  sign  all  checks  drawn  on  the  bank 
account  of  this  company.  He  shall  file  and  preserve  all 
vouchers.  He  shall  render  an  account  at  the  annual  meet* 
ing  and  at  such  other  times  as  the  directors  may  by  reso- 
lution require. 

Sec.  8.  The  Secretary  shall  attend  all  regular  and  spec- 
ial meetings  of  the  directors  and  stockholders  and  shall 
keep  in  a  book  prepared  for  that  purpose  a  true  record  of 
all  proceedings,  and  shall  have  charge  of  the  books,  docu- 
ments and  papers  of  the  company.  He  shall  have  charge  of 
the  seal  and  attach  it  to  all  documents  requiring  sealing, 
but  in  his  absence  or  refusal  to  act  the  President  may  at- 
tach such  seal.  The  Secretary  shall  cerve  all  notices  re- 
quired. He  shall  keep  a  calendar  of  things  required  to  be 
done  by  the  corporation  or  by  him  at  certain  dates  and 
faithfully  observe  said  calendar.  And  in  general  he  shall 
do  all  such  things  as  appertain  to  the  office  of  Secretary 
and  as  shall  be  from  time  imposed  upon  him  by  the  Board 
of  Director*. 


164 


CORPORATIONS. 

ARTICLE  V. 


MT8CEIXANEOU8. 

1.  The  fiscal  year  of  this  company  shall  begin  January 
1st  and  end  December  31st  of  each  year. 

2.  These  by-laws  may  be   altered,   amended   or   repealed 
at   any   regular   meeting   of   the    Board    of    Directors   by   a 
vote  of  the  majority  of  the  same,  or  at  any  special  meeting 
of  the  directors  when  all  are  present. 

4.  Subscription  contract. 

We,  the  undersigned,  hereby  severally  subscribe  for  the 
number  of  shares  set  opposite  our  respective  names,  to  the 
Capital  Stock  of  General  Laundry  Company,  and  we  sever- 
ally agree  to  pay  the  said  company,  for  each  share,  the  sum 
of  One  Hundred  Dollars.  Chicago,  Illinois,  Nov.  15,  1911. 


Name 

Address 

Shares 

Amount 

5.  Certificate  of  stock. 

No Share* 

Incorporated  Under  the  Laws  of  the  State  of 

ILLINOIS 

GENERAL  LAUNDRY  COMPANY. 

Capital  Stock  $10,000  Shares,  $100  each 

Chicago,  Illinois. 

This  is  to  Certify,  that  is  the  own- 
er of  Shares  of  the  Capital  Stock  of 

GENERAL  LAUNDRY  COMPANY. 

Fully  paid  and  non-aascssable. 

transferable  only  on  the  Books  of  the  Company,  in  person 
or  by  Attorney,  on  the  surrender  of  this  Certificate  prop- 
erly endorsed. 


AMEBICAN  COMMEBCIAL  LAW.  165 

In   Witness  Whereof,  the  Seal  of  the  Company  and  the 
signatures  of  the  President  nnd  Secretary  are  hereto  affixed 

at    this    day 

of A.  D.,  19.. 


President. 
Secretary. 


6.  Power  of  attorney  on  the  back  of  certificate. 

For  Value  Received,  the  undersigned  hereby  assign.,  and 

transfer.,   unto   , 

Shares   of  the   Capital    Stock   within   mentioned,   and   do. . 

hereby  constitute  and  appoint    to  be 

true  and  Lawful  Attorney,  irrevocable  for  and 

in name  and  behalf  to  make  the  necessary  trans- 
fer on  the  books  of  the  company. 

Witness hand  at   this  the 

day  of    A.  D. 

19.. 
Witness: 


7.  Stub  from  which  certificate  Is  detached. 

CEBTIFICATB. 

No.   

Fof Shares 

Issued  to 


Dated A.  D.  19.. 


166  COBPORATIONS. 

Transferred  from 


Dated  19. 

No.  Original          ||      No.  Original      ||         No.  of  Shares 
Certificate.  Shares.  Transferred. 


Received  this  Certificate 

8.  Notice  of  annual  meeting. 

25  N.  Blank  Street, 
Chicago,   Illinois, 

Dec.  24,  1911. 
To  the  Stockholders  of  General  Manufacturing  Co. 

The  annual  meeting  of  the  stockholders  of  the  General 
Manufacturing  Co.  will  be  held  at  the  general  offices  of  the 
company  at  25  North  Blank  Street,  Chicago,  Illinois,  on  the 
10th  day  of  January,  1912  at  3  o'clock  P.  M.  for  the  purpose 
of  electing  directors  for  the  ensuing  year  and  transacting 
such  other  business  as  may  come  before  the  meeting. 

Enclosed  find  a  proxy  which  you  may  sign  and  return.  In 
the  event  that  you  are  present  in  person  you  may  withdraw 
the  same. 


Secretary. 

9.  Proxy  for  annual  meeting  of  stockholders. 

KNOW  ALL  MEN  BY  THESE  PRESENTS,  That  the 
undersigned  stockholder  of  the  General  Manufacturing 
Company,  hereby  constitutes  and  appoints,  James  Monroe 


AMEEICAN  COMMEECIAL  LAW.  167 

and  Harry  Smith,  or  cither  of  them,  the  attorney  and  proxy 
of  the  undersigned,  to  attend  and  represent  the  undersigned 
at  the  Annual  Meeting  of  the  stockholders  of  the  General 
Manufacturing  Company  to  be  held  on  the  10th  day  of  Jan- 
uary, A.  D.  1912,  and  all  adjournments  thereof,  and  for 
and  on  behalf  of  the  undersigned,  to  vote  according  to  the 
number  of  shares  of  the  stock  of  said  company,  which  the 
undersigned  would  be  entitled  to  vote  if  there  personally 
present,  hereby  ratifying  and  confirming  all  that  said  at- 
torneys and  proxies,  or  either  of  them,  shall  do  in  the  prem- 
ises, giving  and  granting  unto  said  attorneys  and  proxies 
full  power  of  substitution  and  revocation. 

Dated  at  Chicago,  Illinois,  January  5,  1011. 

(Seal.) 

In  presence  of 


10.   Minutes  of  an  annual  meeting  of  stockholders. 

MlNTJTES  OF  THE  ANNUAL  MEETING  OF  THE  STOCKHOLDERS 
OF  THE  GENEBAL  MANUFACTUBINQ  COMPANY. 

The  annual  meeting  of  the  stockholders  of  the  General 
Manufacturing  Company  was  held  at  the  office  of  the  com- 
pany at  No.  25  North  Blank  Street  in  Chicago,  Illinois,  on 
the  10th  day  of  January,  1912,  at  3  o'clock  P.  M. 

The  meeting  was  called  to  order  by  the  President  of  the 
corporation  who  was  unanimously  chosen  Chairman  of  the 
meeting,  and  who  served  as  such  throughout  the  meeting. 
Mr.  James  Brown,  the  Secretary  of  the  company  being  pres- 
ent, was  appointed  and  acted  as  Secretary  of  the  meeting. 

There  were  present  the  following  stockholders  in  person 
who  responded  to  the  roll  call. 

(Here  follow  names  of  stockholders,  with  number  of 
shares  set  opposite  their  respective  names.) 

The  following  stockholders  were  present  by  proxy: 

(Here  follow  the  names  of  the  stockholders,  with  the 
names  of  their  proxies  and  number  of  shares  set  opposite 
their  respective  names,) 


168  COBPOBATIONS. 

There  being  a  quorum  of  the  stock  present  the  company 
proceeded  to  the  transaction  of  business. 

The  proxies  presented  were  ordered  filed  for  record  with 
the  Secretary. 

The  Secretary  presented,  read  and  appended  in  a  conven- 
ient place  for  perusal  the  roll  of  all  stockholders  entitled 
to  vote,  and  it  remained  so  disclosed  throughout  the  entire 
meeting. 

The  Secretary  then  presented  and  read  a  copy  of  the  no- 
tice of  the  meeting  together  with  the  proof  of  mailing  the 
same  to  each  registered  stockholder  at  his  address  as  it  ap- 
pears on  the  books  of  the  company  at  least  ten  days  prior 
to  the  date  of  holding  the  same. 

The  Minutes  of  the  last  annual  meeting  of  the  stock- 
holders, held  on  Jan.  10,  1911,  were  read  and  approved. 

Upon  motion  duly  made  and  seconded,  the  meeting  pro- 
ceeded to  the  election  of  5  directors  by  ballot  according  to 
the  by-laws  and  the  polls  were  opened  at  3:20  o'clock  P.  M. 

On  motion  duly  made  and  seconded  Messrs.  Henry  Smith 
and  Walter  Goodwin  were  appointed  inspectors  of  election 
and  the  stockholders  delivered  to  them  their  votes. 

The  annual  report  of  the  President  was  then  presented 
and  read  and  upon  motion  of  Charles  P.  Johnson,  duly  sec- 
onded, it  was 

Resolved i  That  said  report  be  received  and  adopted  and 
ordered  filed  with  the  Secretary. 

(Here  insert  other  business,  including  communications 
received,  unfinished  and  new  business.) 

The  polls,  having  remained  open  thirty  minutes  and  every 
stockholder  having  voted,  were  closed  and  the  inspectors 
presented  their  report  in  writing  showing  that  the  following 
gentlemen,  all  stockholders,  had  received  the  highest  num- 
ber of  voteB: 

(Here  place  names.) 

The  Chairman  thereupon  declared  the  said  gentlemen  duly 
elected  directors  of  the  company  to  hold  office  for  one  year 
and  until  their  successors  are  elected  and  qualified. 


AMERICAN  COMMBBOIAL  LAW.  169 

The  Secretary  was  directed  to  insert  in  the  minute  book 
a  copy  of  the  following  papers: 

1.  Notice  of  meeting  and  proof  of  mailing  thereof. 

2.  Form  of  proxy. 

3.  President's  report. 

There  being  no  further  business,  the  meeting  adjourned. 

Secretary. 

11.  Form  of  minutes  of  directors'  first  meeting. 

Minutes  of  the  meeting  of  the  Board  of  Directors  of  Gen- 
eral Manufacturing  Company,  held  in  Chicago,  Illinois,  at 
25  North  Blank  Street,  January  10,  1911,  at  the  hour  of  4 
o'clock  P.  M.  by  the  unanimous  consent  and  appointment  of 
all  of  the  Directors  of  said  corporation. 

The  meeting  was  called  to  order  by  Charles  Henderson, 
who  was  elected  temporary  chairman. 

Henry  Anderson  was  elected  as  temporary  Secretary. 

The  following  directors  were  present  in  person: 
James  Smith, 
Harold    Wright, 
Henry  Anderson, 
Abel  Jones, 
Axel  Johnson, 

being  all  of  the  directors  of  said  corporation.     On  motion 
duly  made  and  seconded  it  was 

Resolved,  That  the  meeting  go  into  the  election  of  perma- 
nent officers. 

(Note:  If  this  meeting  was  in  a  state  in  which  the 
directors  make  the  by-laws,  those  could  be  adopted  at  this 
point,  or  a  committee  could  be  appointed  to  prepare  them. 
If  the  by-laws  were  not  adopted  at  this  meeting,  the  direc- 
tors by  resolution  could  establish  the  permanent  offices  or 
could  simply  proceed  to  the  election  of  the  usual  officers,  and 
make  the  by-laws,  subsequently  adopted,  conform  to  this 
state  of  facto.) 


170  COBPOBATIONS. 

On  motion  duly  made  and  seconded,  Harold  Wright  waa 
elected  to  the  office  of  President  of  the  company,  for  the 
term  of  one  year  and  until  his  successor  is  chosen  and  qual- 
ified; and  being  present  in  person,  Mr.  Wright  signified  his 
acceptance  of  said  office,  and  thereupon  took  the  chair  and 
presided  during  the  remainder  of  the  meeting. 

(Here  elect  other  officers.  If  more  than  one  candidate  for 
an  office,  the  election  may  be  by  ballot.) 

Thereupon  the  following  communication  was  read  to  the 
Board  of  Directors  by  the  President. 

To  the  President  and  Board  of  Directors  of  the  General 
Manufacturing  Company: 

Gentlemen : 

I  am  the  »ole  owner  of  the  following  described  property 
located  at  Number  302  Dearborn  Street,  Chicago,  Illinois, 
viz.: 

A  manufacturing  plant    consisting    in,    etc.,    val-  . 

ued   at    $10,425.00 

Merchandise,   valued   at    1,874.00 

Accounts    receivable    1,247.00 

Cash  on  hand  .  672.00 


Total   $14,218.00 

This  property  is  owned  in  connection  with  a  business 
which  has  been  conducted  by  me  in  my  name  for  ten  years. 
I  regard  the  good  will  thereof  to  be  worth  at  a  fair  con- 
servative value,  at  least  $7,500. 

I  propose  to  sell  said  property  and  good  will  to  your 
company,  provided  you  will  assume  the  outstanding  ac- 
counts, amounting  to  $3,718.00,  and  the  outstanding  bills 
payable  amounting  to  $1,000,  for  the  price  of  Seventeen 
Thousand  Dollars  and  I  will  receive  in  payment  of 
said  purchase  price  of  said  property  One  Hundred  and 
Seventy  shares  of  the  capital  stock  of  your  company, 
being  the  number  of  shares  I  have  heretofore  subscribed  for 
in  107  original  subscription,  the  said  One  Hundred  and 


AMERICAN  COMMERCIAL  LAW.          171 

Seventy  shares  to  be  issued  to  me  as  fully  paid  and 
non-assessable,  the  certificates  to  be  issued  and  delivered  to 
me  as  soon  as  I  have  delivered  and  conveyed  and  assigned 
said  property  to  your  company. 

Respectfully, 

JAMES  SMITH. 

Dated,  Chicago,  Illinois,  November  20,  1911. 

Mr.  James  Smith  then  retired  from  the  room  and  re- 
mained out  during  the  following  discussion  and  Resolution. 
After  some  discussion,  the  following  Resolution  was  adopted, 
all  directors  except  Mr.  James  Smith  voting  in  its  favor. 

Whereas:  James  Smith  has  offered  by  the  written  propo- 
sition above  spread  upon  the  minutes,  to  sell,  assign  and 
convey  to  this  corporation  certain  property  for  $17,000 
and 

Whereas:  Said  property  is  deemed  by  the  Board  of  Direc- 
tors to  be  worth  the  sum  of  $17,000  to  this  corporation, 
and  it  is  deemed  to  the  best  interests  of  this  corporation 
to  accept  said  proposition,  Therefore,  it  is 

Resolved,  That  this  company  accepts  the  above  proposi- 
tion of  Mr.  James  Smith,  and  hereby  purchases  said  prop- 
erty mentioned  in  said  proposition  and  assumes  the  out- 
standing accounts  and  bills  payable  as  therein  stated,  and 
shall  pay  said  Seventeen  Thousand  Dollars  for  said 
property  by  issuing  and  delivering  to  said  James 
Smith  One  Hundred  and  Seventy  shares  of  this  com- 
pany of  the  par  value  of  $100,  as  fully  paid  and  non-assess- 
able, being  the  original  subscription  of  said  James  Smith, 
upon  the  execution  of  the  proper  instruments  of  transfer 
and  bills  of  sale. 

Be  it  Further  Resolved,  That  the  Secretary  be  and  he  is 
hereby  authorized  to  accept  said  property  on  behalf  of  this 
company  and  deliver  certificates  for  one  Hundred  Seventy 
shares,  as  aforesaid. 

There  being  no  further  business,  the  meeting  adjourned 
to  convene  again  at  2  o'clock  P.  M.  on  Jan.  12,  1911,  at  the 
same  place. 


172  COBPOBATIONS. 

(Note:  In  the  minutes  of  the  stockholders  held  prior  to 
the  above  meeting,  it  should  appear  that  they  received  the 
above  communication  [which  need  not  be  set  out  at  length 
in  such  minutes]  and  that  they  referred  it  to  the  directors 
and  advised  its  acceptance.) 

(Note:  In  a  subsequent  meeting  the  bill  of  sale  and 
other  instruments  of  transfer,  if  any,  executed  and  received 
pursuant  to  the  resolution  above,  should  be  copied  in  the 
minutes  and  approved.) 

12.  Certificate  of  copy  of  resolution  for  bank  upon  filing 

account. 

"Resolved,  That  the  Treasurer  be  hereby  authorized  to 
open  a  bank  account  in  the  name  and  on  behalf  of  this 
company  with  the  16th  National  Bank  of  Chicago,  Illinois, 
and  that  he  deposit  the  funds  of  this  company  therein; 
and  that  the  checka  of  this  company  against  such  deposit 
be  signed  by  its  Treasurer  and  countersigned  by  its  Pres- 
ident, and  said  16th  National  Bank  of  Chicago  is  hereby 
authorized  to  honor  said  checks  and  make  the  payments 
according  to  the  tenor  thereof,  until  notice  to  the  contrary." 

I,  William  Smith,  Secretary  of  the  General  Manufactur- 
ing Company  do  hereby  certify  that  the  above  and  forego- 
ing is  a  true,  complete  and  correct  copy  of  a  resolution 
of  the  Board  of  Directors  of  said  company,  passed  at  a 
duly  convened  meeting  thereof,  held  on  the  27th  day  of 
November,  1911,  as  taken  from  and  compared  with  the 
original  resolution  in  the  minute  book  of  said  company. 

In  Witness  Whereof,  I  have  hereunto  affixed  my  signa- 
ture and  the  seal  of  the  company  at  Chicago,  this  28th  day 
of  November,  1911. 

(Corporate  Seal)  WILLIAM  SMITH, 

Secretary. 

13.  Resolution  declaring  dividend.    , 

Resolved,  That  a  dividend  of  five  per  cent  on  the  capital 
stock  of  this  corporation  be  and  the  same  is  hereby  de- 


AMERICAN  COMMEBGIAL  LAW.          173 

clared  out  of  the  surplus  earnings  of  the  corporation,  pay- 
able to  the  stockholders  of  the  corporation  as  they  appear 
of  record  on  the  books  of  the  company  at  the  close  of  bus- 
iness on  the  24th  day  of  December,  1911,  said  dividend  to 
be  due  and  payable  December  31,  1911. 
of 

Resolved,  That  a  dividend  of  five  per  cent,  on  the  capital 
etock  of  this  corporation  be  and  the  same  is  hereby  de- 
clared out  of  the  surplus  earnings  of  the  corporation,  pay- 
able to  the  stockholders  in  proportion  to  their  respective 
holdings  and  payable  on  January  31,  1911. 

14.   Notice  of  special  meeting   (to  Increase  stock). 

25  N.  Blank  Street,  Chicago,  111.,  Nov.  20,  1911. 
To  James  Smith. 

You  are  hereby  notified  that  a  special  meeting  of  the 
stockholders  of  the  General  Manufacturing  Company,  will 
be  held  at  its  general  offices  at  25  North  Blank  Street, 
Chicago,  Illinois,  on  the  20th  day  of  December,  1911,  at  2 
o'clock  P.  M.  for  the  purpose  of  considering  the  question 
of  increasing  the  capital  stock  of  said  corporation,  at  which 
time  you  are  requested  to  appear. 


Directors. 

15.  Form  of  resignation  for  officer. 

November  20,   1911. 

To   the  President   and   Board   of  Directors   of  the   General 
Manufacturing  Company, 

Gentlemen:  I  herewith  tender  my  resignation  as  a  Treas- 
urer of  the  General  Manufacturing  Company  to  take  effect 
immediately. 

Airoucw  JOHJTSOK. 


APPENDIX  B. 

QUESTIONS  AND  PROBLEMS. 


APPENDIX  B. 

QUESTIONS  AND  PROBLEMS. 

CHAPTER  ONH. 

1.  Why  la  a  corporation  called  an  "artificial  person?" 

2.  A  law  la  passed  making  It  a  misdemeanor  for  any  "per- 
son" to  employ  a  child  under  14  years  of  age.     Does  this  apply 
to  corporations?     Why? 

3.  The  stock  of  a  certain  railroad  company  was  held  by  t 
manufacturing  corporation   which   had  no  power  of  eminent  do- 
main.    The  railroad  company  brought    proceedings    to    condemn 
certain  property  for  railroad  uses.     A  defense  was  made  that  this 
was  really  aa  action  by  the  manufacturing  company  which  owned 
all   the  stock.     Should  this  defense  prevail?     Why? 

4.  State  some  differences  between  a  corporation  and  a  part- 
nership.    What  Is  a  "Joint-stock"  company? 

V  5.     State  some  reasons  for  the  Incorporation  of  companies. 
Explain  fully. 

6.  What  Is  a  stock  corporation?    A  non-stock  corporation! 
A   municipal  corporation?     A  quasi-municipal   corporation? 

7.  Can  a  corporation  commit  a    tort?     Can  It    commit    » 
crime?    What  In  general  Is  its  power  to  contract? 

CHAPTER  TWO. 

8.  Can  •  corporation  exist  without  a  charter? 

0.     What  Is  the  power  of  the  United  States  goTcrnment  to 
Incorporate  companies? 

10.     State  In  a  general  way  how  Incorporation  of  a  company 
la  brought  about  under  present  state  laws. 

(177) 

I  *— H 


178  COBPOBATIONS. 


11.  In  what  docs  the  charter  of  a  corporation  consist? 

12.  What  was  the  decision  in  the  Dartmouth  College  easel 
How  was  its  effect  in  a  large  measure  overcome  In  respect  to  cor- 
porations thereafter  created  in  the  various  states? 

13.  Define  a  de  facto  corporation  ;  a   de    jure    corporation. 
May  there  be  a  de  facto  corporation  without  a  charter?     What 
three  things  are  essential  to  existence  as  a  de  facto  corporation? 

14.  May  a  charter  be  amended?     In  what  way?     Is  It  as 
easy  to  amend  a  charter  as  a  by-law?    If  a  charter  is  amended  to 
Increase  the  capital  stock,  how  much  of  the  capital  stock  is  each 
shareholder  entitled  tot 


CHAPTER  THREE!. 

15.     State  some  reasons  why  It  hi  sometimes  a  disadvantage 
to  Incorporate? 

\        16.     Why  la  it  better,  other  things  being    equal,    to    Incor- 
porate in  the  home  state? 

17.  What  limitations  are  there  upon  the  choice  of  a  cor- 
porate name?    Need  the  name  in  Itself  signify  that  the  concern  la 
Incorporated? 

18.  What  are  the  by-laws?     Name  some  usual  provisions? 
Do  the  stockholders  or  the  directors  make  the  by-laws?     Are  by- 
laws absolutely  essential?     How  doea  a    by-law    differ    from    a 
resolution? 

19.  What  is  the    minute  book?     The    stock    ledger?    The 
transfer  books?    The    stock    certificate    book? 


CHAPTER  FOUR. 

20.  la  a  promoter  an  essential  character  In  the  formation  of 
a  corporation?  What  uses  has  the  promoter?  When  is  the  cor- 
poration liable  upon  the  contracts  of  the  promoter? 


AMEBICAN  COMMERCIAL  LAW.  179 


21.  A   had  an  option  to  purchase  certain  land  for  $67,500. 
lie  represented   to  certain   parties  that  the    land    could    not    be 
bought  for  less  than  $80,000.     A  corporation  was  then  formed  by 
A.  and  the  others,  and  the  land  was    then    conveyed  to    Che    cor- 
poration for  $80,000,  thereby  giving  A.  a  secret  profit  of  $12,500. 
The  corporation  now  sues  A.  for  that  amount.     Can  It  recover? 
Why? 

CHAPTER  FIVE. 

22.  Define  capital   stock  ;   share  of   stock.     What  fixes   the 
amount  of  capital  stock? 

23.  What   is    common     stock?     Preferred     stock?     Unissued 
slock?   Treasury  stock? 

24.  Can   a  preferred   shareholder  sue  the  corporation   if  a 
dividend  is  not  declared? 

2ft.     What  is  the  purpose  of  the  stock  certificate? 


CHAPTER  SIX. 

20.  A,  being  sued  upon  his  subscription  to  shares  of  a  cor- 
poration, defended  that  he  had  been  induced  to  subscribe  for  such 
stock  by  fraudulent  representations  made  by  such  corporation 
through  Its  agent,  (a)  In  order  that  he  may  prevail  what  must 
ho  show  in  respect  to  the  character  of  such  representations?  (b) 
What  must  he  show  in  respect  to  his  diligence  in  repudiating  the 
subscription?  (c)  Suppose  the  corporation  becomes  Insolvent  be- 
fore he  repudiates,  why  would  this  have  any  bearing  upon  his 
rights? 

27.  In  order  to  induce  B.,  C.,  D.,  and  B.,  to  subscribe  to  the 
shares  of  a  certain  corporation,  A.  was  Induced  to  subscribe  on 
condition  that  he  should  not  be  required  to  pay  more  than  50  per 
cent  of  the  par  value  of  the  shares.  This  collateral  agreement 
was  unknown  to  others.  A.  is  now  sued  by  the  corporation.  Can 
be  set  up  this  agreement? 


180  COBPOBATIONS. 


CHAPTER  SEVEN. 

28.  May  t  corporation  Issue  shares  In  exchange  for  property 
other  than  money? 

•*  29.     What   IB   "watered   stock"? 

80.  A.,  B.  and  C.  form  a  corporation  capitalized  at  $100,000, 
A.  is  an  Inventor  and  has  a  patent  which  he  expects  to  become 
very  valuable,  but  as  yet  It  has  no  value  in  the  market  A.  is  to 
receive  stock  whose  par  value  Is  worth  $99,800  In  exchange  for 
his  patent  ;  and  certificates  are  Issued  to  him  reciting  that  his 
stock  Is  fully  paid  and  non-assessable.  B.  and  C.  subscribe  for 
one  share  each  of  the  par  value  of  $100.  The  corporation  soon 
becomes  Insolvent  owing  $10,000.  Have  the  creditors  any  remedy 
o  gainst  A? 

31.  A.  subscribes  for  stock  at  10  per  cent  of  its  par  value, 
receiving  certificates  reciting  that  the  stock  is  fully  paid  and  non- 
assessable.    Can  the  corporation  recover  anything  further?     Can 
creditors? 

32.  May  a  corporation  declare  a  forfeiture  of  stock  for  non- 
payment? 


CHAPTER  BIGHT. 

83.     If  the  directors  refuse  to  declare  dividends,  what  remedy 
has  the  stockholder? 

34.  The  directors  of  the  A.  B.  Company,  a  corporation,  are 
planning  to  make  a  contract  which  the  corporation  has  no  char- 
ter power  to  enter  into.     This  contract  will  involve  the  expendi- 
ture of  considerable  money.     One   of  the  small   stockholders  de- 
sires to  prevent  this  action.    Has  he  any  remedy?    Discuss  fully 
his  rights. 

35.  Can  a  single  stockholder  prevent  a  sale  of  all  the  assets 
of  a  solvent,  going  concern,  made  for    the    purpose    of    discon- 
tinuing the  business  of  the  company?    Can  he  prevent  an  amend- 
ment of  the  charter  which  will  result  In  a  material  change  of 
object? 

80.     State  the  right  of  a  stockholder  to  Inspect   the  book* 
and  records  of  the  company. 


AMERICAN  COMMERCIAL  LAW.  181 


87.  Discuss  fully  the  right  of  a  stockholder  to  enter  Into 
contracts  with  the  company,  as  for  Instance,  contract!  to  sell  to, 
or  buy  from  It  or  contracts  of  employment. 


CHAPTER  NINB. 

88.  State  some  purposes  of    a    stockholders'    meeting.     In 
general,  what  two  classes  of  stockholders'  meetings  are  there? 

89.  Where  a  special  meeting  Is  called,  what  must  the  call 
and  the  notice  contain?  Is  it  necessary  to  give  a  notice  of  the 
annual  meeting? 

40.  In  what  two  ways  may    a    stockholder    have    himself 
credited  with  attendance  and  exercise  bis  right  to  vote? 

41.  May  a  proxy  be  recalled  by  the  stockholder? 

42.  What  Is  a  voting  trust?    What  Is  Its  purpose? 

43.  What  Is  meant  by  "closing  books"    for    a    stockholders' 
meeting?     What  right  has   a  corporation   thus  to  close  its  sub- 
scription books? 

44.  What  constitutes  a  quorum  at  a  stockholders'  meeting? 

45.  There  are  three  stockholders,  A.,  B.  and  C.   in  the   SI. 
Manufacturing  Company.     A.  owns  100  shares,  B.,  50  shares,  C. 
1  share,  and  there  are  25  shares  treasury  stock    and    24    shares 
unissued  stock  making  a  total  of  200  shares  being  all  the  shares 
of  stock  of  said  corporation.    A.,  B.  and  C.  attend  a  stockholders' 
meeting.    How  many  votes  can  A.,  B.,  C.  and  the  corporation  cast 
respectively  ? 

40.     What  Ui  meant  by  cumulative  Toting?    Illustrate.       ** 

47.  What  officers  preside  at  and  conduct  the  stockholders' 
meeting? 

CHAPTER  TEN. 

48.  What  is  a  stock  certificate? 

49.  How  la  transfer  of  shares  effected? 

60.     A.  borrowed  from  B.,  a  broker,  $1,000,  and  to  secure  B., 
left  with  blm  a  certificate  of  20  shares  of  stock  in  the  M.  Con- 


182  CORPORATIONS. 


pany,  worth  $2,000.  There  was  the  usual  blank  on  the  back  of 
the  certificate,  which  A.  signed  In  order  that  B.  might  be  able  to 
enforce  his  security  In  case  of  A's  default.  Long  before  the  loan 
was  due,  B.,  In  violation  of  his  contract,  representing  that  he  was 
the  owner  filled  up  the  blank  over  A's  signature  and  sold  the  cer- 
tificate to  C.,  who  paid  B.  $2,000.  C.  surrendered  the  certificate 
to  the  transfer  clerk  of  the  M.  Company,  secured  a  new  certificate 
in  the  place  thereof  and  was  registered  on  the  books  as  a  stock- 
holder. What  are  A's  rights,  If  any,  against  B.,  C.,  and  the  M. 
corporation?  Does  C.  get  a  good  title  to  the  stock?  Suppose  B. 
had  forged  A's  signature.  Would  this  make  any  difference? 

51.  A.  had  a  share  of  stock  In  the  M.  corporation  which 
recited  that  the  stock  was  fully  paid  and  non-assessable.  He 
transferred  It  to  E.,  a  purchaser  for  value.  As  a  matter  of  fact 
the  stock  was  totally  unpaid.  The  corporation  became  Insolvent. 
Have  the  creditors  of  the  corporation  any  rights  against  A.  7 
Against  B.? 

62.     May  by-laws  be  passed  prohibiting  transfer  of  stock? 


CHAPTER  ELEVEN. 

53.  State  the  various  kinds  of  dividends. 

54.  Who  declares  dividends? 

B5.  As  between  one  who  owns  stock  when  a  dividend  Is  de- 
clared and  one  who  owns  it  at  the  date  the  dividend  is  by  its 
terms  payable,  who  Is  entitled  to  the  dividend? 

56.     State  the  right  to  dividends  upon  preferred  stock. 

CHAPTER  TWELVE. 

5T.     What  Is  the  purpose  of  the  directorate? 

58.  Must  a  director  be  a  stockholder?  Must  he  b«  t  resi- 
dent of  the  state? 

69.     How  are  directors  elected? 

60.  May  a  director  be  removed  before  the  expiration  of  the 
term  for  which  be  was  elected? 


AMERICAN  COMMEBCIAL  LAW.  183 


61.  May  a  director  make  a  contract  with  the  corporation? 
Suppose  that  hla  rote  Is  necessary  to  secure  the  contract,  yet  the 
contract  1*  fair,  may  a  stockholder  object? 

62.  In  what  manner  must  directors  exercise  their  powers? 

63.  What  constitutes  a  quorum  at  directors'  meetings?   Sup- 
pose that  a  bare  quorum  is  present,  and  a  majority  of  that  quorum 
is  a  minority  of  the  full  number  of  directors,  can  such  majority 
pasa  resolution!? 


CHAPTER  THIRTEEN. 

64.  State  the  usual   duties   of    the    President;    the    Vlce- 
Fresident    What  are  their  usual  powers  to  act  for  and  bind  the 
corporation  T 

65.  State  the  usual  duties  of  the  Secretary ;  his  authority 
to  bind  the  corporation  upon  contracts. 

66.  State  the  usual  duties  of  the  Treasurer;  his  authority 
to  bind  the  corporation  upon  contracts. 

67.  If  a  contract  of  the  corporation  is  to  be  signed  by  the 
President,  and  the  seal  affixed  and  attested    by    the    Secretary, 
Illustrate  the  manner  of  signature  and  sealing  that  should  be  em- 
ployed  by  auch  officers. 

CHAPTER  FOURTEEN. 

68.  Fins  a  corporation  the  power  to    Issue   bonds    and    to 
mortgage  Ita  property  where  that  is  not  expressly  glren   in   the 
charter? 

69.  State  the  two  usual  forms  of  bond*, 
TO.     How  Is  the  bond  secured? 


CHAPTER  FIFTEEN. 

Tl.  Wnat  Is  the  "trust  fund"  doctrine?  If  the  corporation 
becomes  tnsolTent,  what  rights  hare  creditors  against  stock- 
holders whose  stock  is  unpaid.  Are  stockholders  entitled  to 
•hare  in  ttt  diTialoB  of  the  assets  before  creditors  are  completely 


184  COBPOBATIONS. 


paid?  Suppose  there  are  preferred  shareholder!  who  hold  tbel* 
shares  under  an  agreement  with  the  corporation  that  they  are  en- 
titled to  priority  In  a  division  of  the  assets  of  the  corporation,  aa 
well  as  a  priority  In  the  payment  of  dividends,  does  this  glv« 
them  the  right  to  be  paid  before  the  general  creditors? 


CHAPTERS  SIXTEEN  AND  SEVENTEEN. 

72.  What  are  the  three  classes  of  powers  of  a  corporation? 
What  are  the  powers  Inherent  In  corporate  existence? 

73.  What  powers  will  be  implied  from  the  express  charter 
powers?    State  the  rule. 

74.  A  railroad   company  guaranteed   the  interest  and  div- 
idends on    stock    and    bonds     of    a  summer  hotel,  which  would 
Increase  its  business.     Do  you  think  this    an    ultra    vires    act  ? 
Discuss.     (Western  Maryland  B.  Co.  T.  Blue  Ridge  Hotel  Co.,  102 
Md.  807,  2  L.  R.  A.  N.  8.  887). 

75.  What  is  the  power  of  a  corporation  to  own  real  estate 
where  there  Is  no  such  power  expressly  given  in  the  charter. 

78.  May  a  corporation  own  shares  of  other  corporations, 
where  it  has  no  such  powers  expressly  given?  May  a  corporation 
acquire  Its  own  shares? 

77.  Where  a  contract  has  been  made  which  is  ultra  vires, 
may  it  ever  be  enforced?  When  may  it  not  be  enforced? 


CHAPTER  EIGHTEEN. 
> 

7S.     Define  a  foreign  corporation. 

79.  Name  some  common  statutory  provisions  in  respect  to 
foreign  corporations. 

80.  Suppose  that  all  the  stockholders,  directors,  and  officers 
of  a  corporation  live  in  Illinois,  but  it  Is  Incorporated  under  the 
laws  of  New  Jersey,  is  it  a  foreign  corporation  in  Illinois? 

81.  When  does  a  foreign  corporation  have  a  right  to  enter 
a  state  without  complying  with  the  foreign  corporation  law? 


AMERICAN  COMMERCIAL  LAW.  185 


CHAPTER  NINETEEN. 

82.  Define  a   "trust"     IB   It  legal   or   illegal? 

83.  What  is  the  attitude  of  the    law    toward    corporations 
which  are  formed  to  monopolize  or  restrain  trade? 


CHAPTER  TWENTY. 

84.  Name  the  various  ways  in  which  a  corporation  may  b« 
dissolved. 

85.  Upon  dissolution  what  become*  of  the  assets  of  a  cor- 
poration ? 


INDEX. 

(References  are  to  Section*.) 


Adjournment, 

of  stockholders'  meeting,  62. 
Administrators, 

voting  powers  of,  54. 
Amendment  of  charter, 

power  of  state  to  make,  t. 

procedure  to  secure,  13. 

objections  to,  by  minority  stockholders,  48. 
Amendment  of  minutes,  65. 

approval  of  minutes,  63. 

assessments,  3,  82. 


Board  of  Directors,  sea  "Directors.* 
Bonds, 

power  to  issue,  90. 

negotiability  of,  §7. 

kinds  of,  98. 

security  of,  99. 

remedies  upon,   100. 
Books, 

of  account,  tl. 

for  corporate  records,  SO. 

right  of  stockholder  to  inspect,  43, 

closing  for  corporate  meetings,  M. 
By-laws, 

necessity  of,  20. 

who  makes,  20. 

validity  of.  20. 

provisions  of,  20. 

restraining  transfer,  68. 

(187) 


188  CORPORATIONS. 

(References  an  to  Section.) 
C* 

Calender,  21,  02. 

Calls  for  payment,  38. 

Calls  for  stockholders'  meetings,  50. 

Capital  stock,  see  "Stock." 

Certificate  of  incorporation, 

as  constituting  charter,  11. 
Certificate    of    stock, 

defined,  28. 
Charter,  see,  also,  "Power*  of  Corporation," 

necessary  to  corporate  existence,  1. 

necessity  and  nature  of,  7. 

from  federal  government,  8. 

power  of  state  to  amend  or  repeal,  t. 

amendment  of  by  stockholders, 
procedure   for,    13. 

objection  to,  by  minority  stockholders,  41. 

form  of, 

special  statute,  10 

certificate  under  general  incorporation  law,  11* 

defective  charter,  12. 

steps  to  obtain,  18. 

determines  amount  of  capital  stock,  isV 

cannot  be  sold,  117. 
Closing  books,  56. 
Common  stock,  see  "Stock." 
Conditional   subscriptions,   31. 
Consolidation  of  corporations,  128. 
Contracts  of  corporation, 

Bee,   also,   "Powers   of   Corporations," 

power  to  make,  4. 

execution  of  by  officers,  95. 
Corporation, 

defined,  1. 

constitutes  legal  entity,  1. 

distinguished   from   partnerships,  B. 


AMERICAN  COMMEBCIAL  LAW.  189 

(References  are  to  Section*.) 

reasons  for  organizing,  3. 

power  of  to  commit  torta  and  crimes,  4 

kinds  of,  f. 

purposes  for  which,  may  be  formed,  C, 

de  facto  and  de  jure,  if. 
Creditors  of  corporation, 

right,  of,  106,  107,  108,   120,  35,  Tl,  10-101. 
CrimM, 

corporation  may  commit*  4. 
Cumulatin  voting,  00. 


De  facto  corporation,   IS. 
Dt  jure  corporation,  II. 
Directors, 

discretion  of,  in  declaring  dividends,   74,  77* 

arc  managers  of  corporation,  78. 

must  act  as  board,  78. 

qualifications  of,  79. 

election  of,  80. 

remoral  of,  81. 

responsibility  of, 

to  corporation,  82. 
to  third  persons,  83. 

right  to  deal  with  corporation,  84. 

right  to  salary,  84. 

powers  of,  85. 

meetings  of,  80-88. 

Dissolution  of  corporations,  128,  lit. 
Dividends, 

stockholder's  right  to,  40. 

definition  of  and  kinds,  71 

declaration  of,  74. 

payment  of,  75. 

who  entitled  to,  78. 

upon  preferred  stock,  77* 


190  COBPOBATIOXS. 

(Reference*  are  to  Sections.) 


Executor*, 

voting  power*  of,  M. 


F. 


Foreign  corporation, 

disadvantage*  of,  18. 

defined,  120. 

statutory  provisions  in  respect  to,  12L 

constitutional  right*  of,  123. 

what  constitute*  business  by,  122. 

suits  against,  124. 

Forfeiture  of  stock  for  non-payment,  38. 
Form  of  charter, 

special  statute,  10. 

certificate  under  general  law,  11. 
Franchise,    ( Charter ) , 

necessary  to  corporate   existence,   1. 
Fraud, 

in  stock  subscriptions,  31. 

in  valuation  of  property  exchanged  for  stock,  34,  35. 


Increase  of  capital  stock, 

must  be  by  amendment  to  charter,  25. 

present   shareholders   may   subscribe   pro   rata   to   in- 
crease, 13. 
Insolvent   corporation*, 

defined,  102. 

right*  of,  104,  105. 

right*  against,  106,  108. 


Joint  clock  companies, 
defined,  S. 
*r*  essentially  partnenhipt,  ft, 


AMEBICAN  COMMERCIAL  LAW.  191 

(References  are  to  Section*.) 


Liability, 

of  stockholders.    See  also  "Creditors." 

in  general,  32,  35. 
of  transferee,  70,  71. 
of  transferor,  72. 

M. 

Meetings  of  directors, 

essential  to  valid  action,  80. 

are  regular  and  special,  80. 

how  called,  86. 

quorum  of,  86. 

method  of  business  at,  17. 

minutes  of,  88. 
Meetings   of   stockholders, 

organization  meeting,  19. 

right  to  hold,  46. 

purposes  of,  47. 

regular  and  special,  48. 

the  annual  meeting,  48. 

how  special  called,  49. 

notices  of,  50. 

waivers  of  calls  for,  52. 

attendance  at,  53, 
by   proxy,  58. 

voting  at,  54. 

who  may  vote  at,  54,  65,  501 

order  of  business   at,   61. 

quorum  of,  68. 

officers  of,  60. 

adjournment   of,    62. 

minutes  of,  03,  64,  M. 
MinuU  books,  81. 
Minute*, 

defined,   99 

legal  effect  of.  M. 

approval  of,  ft*. 


192  COBPOBATIONB. 

(Reference*  are  to  Sections.) 

amendment  of,  65. 

books  of,  21. 
Monopoly, 

defined,  125, 

illegal,  127. 
Mortgage*, 

power  to  issue,  98. 

as  security  for  bond*,  09. 

remedies  upon,  100,  101. 
Municipal  corporations, 

defined,  0. 

N. 
Name  of  corporation,  17. 

O. 

Officers,    see    "President,"    "Vice-President,*    Treasurer, 

"Secretary." 
execution  of  contract*  by,  95. 


Partnership*, 

differ  from  corporations  how,  8. 

liabilities  of  members  of,  3. 
Payment  for  stock,  see  "Stock." 
Pledgees, 

voting  powers  of,  54. 

Power  of  state  and  federal  governments  to  grant  charters,  8. 
Powers  of  corporation, 

to  commit  torts,  4. 

to  commit  crimes,  4. 

general,  to  contract,  4 

classification  of,  109. 

inherent,  109, 

express,  110. 

implied,  111. 

notice  of,  112. 

contracts  not  within,  113 

certain  particular  powers,  114. 


AMEBIOA.N  COMMBBOIAL  LAW*          193 

(References  are  to  Section!.) 

U  borrow  money,  115. 

to  mortgage  property,   115. 

to  Mil  assets,  117. 

to  acquire  stock,  118,  119. 

not  lost  by  non-user,  128. 
Preferred  stock, 

Bee  "Stock." 
President, 

as  presiding  officer  of  stockholders'  meeting,  60. 

elected  by  directors,  00. 

duties  of,  90. 

execution  of  contract*  by,  95. 
Procedure  to  obtain  charter,  18. 
Promoter, 

defined,  22. 

liability  of,  22. 

rights  and  obligations  of,  23,  24 

secret   profits   by,   24. 
Prospectus, 

part  of  subscription  contract,   30, 
Public  corporations, 

defiaed,  5. 
Purposes  for  which  corporation*  may  be  formed,  8. 

Q. 

Quorum, 

at  stockholders'  meeting,  58. 
at  directors'  meeting,  86. 

R. 

Reasons  against  incorporation,   15. 

Reasons  for  incorporation,  3. 

Reserration  of  power  to  alter  charter  by  state,  t. 

Resolution,  purpose  of,  20. 


Sale  of  assets,  117. 

Sale  of  stock.    See  "Transfer  of  Stock. 

I   B—  18 


CORPORATIONS. 

(References  are  to  Section*.) 

Seal,  Off. 

Secretary.    See,  also,  "Transfer  of  Stock,"  "Meetings,"  etc. 

as  secretary  of  stockholders'  meetings,  60. 

duties  of,  92,  94. 
Services,  payment  of  stock  in,  33. 
Sherman  Law,  127. 
Stock, 

See,  also,  "Transfer  of  Stock." 

defined,  25. 

share  of,  defined,  25. 

amount  of,  determined  by  charter,  25. 

common,  defined,  26. 

preferred,  defined,  26. 

cumulative,  defined,  26. 
non-cumulative,  defined,  26. 
called  "guaranteed  stock,"  26. 

unissued,   defined,   27. 

treasury,  defined,  27. 

payment  for,  32,  38. 

"watered,"   33. 

dividends  upon,  40,  73-77. 

power  of  corporation  to  acquire  shares  of,  118,  119. 
Stock  corporations, 

defined,  5. 
Stockholders, 

liability  of,  32,  35,  45. 

right  to  dividends,  40. 

right  to  prevent  wrongful  acta  by  corporata  officials,  41. 

right  to  prevent  sale  of  assets,  42. 

right  to  prevent  change  of  object,  42. 

right  to  inspect  corporate  records,  43. 

right  to  deal  with  corporation,  44. 

meetings  of,  see  "Meetings." 
Stock  ledgers,  21. 
Subscriptions, 

form,  manner  and  effect  of,  29. 

fraud  in,  30. 

conditional,  31. 


AMERICAN  COMMERCIAL  LAW. 

(References  are  to  Sections.) 

T. 

Torta, 

corporation  may  commit,  4. 
Transfer  books,  21. 
Transfer  of  stock, 

method  of,  67. 

duties  of  secretary  or  transfer  clerk  in,  87 

effect  of  66,  70,  71,  72. 

restrictions  upon,  68. 

title  by,  69. 

without  authority,  09. 

by   forgery,   69. 
Treasurer, 

duties  and  powers  of,  OS,  04 
Treasury    stock, 

defined,   25. 

corporation  cannot  vote,  54. 
Trust, 

defined,  125. 
Trustees, 

voting   powers,   54. 
Trust  fund  doctrine,  107. 

U. 

"Ultra  vires."     See  "Powers  of  Corporation." 

right  of  stockholder  to  prevent  acts,  41. 

defined,  113. 
Unissued  stock, 

defined,  25. 

corporation  cannot  vote,  64. 

V. 

Vice-president, 

duties  and  powers  of,  01. 
Voting  trusts,  55,  125. 

W. 

Where  to  incorporate,   16. 


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